Hello, and welcome to the Paycor Second Quarter 2023 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to VP of Investor Relations, Rachel White. Rachel, please go ahead. .

Good afternoon, and welcome to Paycor's earnings call for the second quarter of fiscal year 2023, which ended on December 31. On the call with me today are Raul Villar, Jr., Paycor's Chief Executive Officer; and Adam Ante, Paycor's Chief Financial Officer. .

Our financial results can be found in our press release issued today, which is available on the Investor Relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call..

Statements made on this call include forward-looking statements related to our financial results, products, customer demand, operations, impact of COVID-19 on our business and other matters.

These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date..

We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors. Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website..

With that, I'll turn the call over to Raul. .

Thank you, Rachel, and thank you all for joining us to discuss Paycor's fiscal second quarter results. Paycor's modern open platform with differentiated tools for leaders in industries continues to resonate with clients and win in the market. Revenue grew 29% this quarter, driven by record bookings and ongoing PEPM expansion.

Adjusted operating income margin increased by over 300 basis points year-over-year, and we believe there is significant opportunity to drive further expansion as we scale. Based on these robust results and our optimistic outlook for the remainder of the year, we are once again raising our guidance, which Adam will discuss in more detail. .

Our go-to-market motion continues to deliver excellent results as we strategically expand sales coverage in Tier 1 markets, leverage influential broker relationships and continue to grow our average deal size.

We are ahead of schedule with sales hiring and already achieved the low end of our 20-plus percent seller headcount growth target for the year. We like our sales staffing level, and we'll continue to evaluate additional hiring in the second half..

We offer the only modern cloud platform empowering frontline leaders to be more effective by providing the insights and tools required to source, attract, develop and retain their employees. This quarter, we introduced the COR Leadership Dashboard that provides actionable information to help transform managers into effective frontline leaders.

The COR Leadership Dashboard surfaces real-time employee insights and evaluates leadership effectiveness by gathering feedback on how well they coach, optimize and engage their team. Armed with these insights, companies will understand leader effectiveness and be able to tailor ongoing leadership development..

Given the continued tightness in the labor market, our clients' top priority remains finding and retaining talent. This quarter, we closed the Talenya acquisition and began beta testing Paycor Smart Sourcing, which leverages AI to simplify and streamline the sourcing efforts of frontline leaders to find skilled and diverse talent.

Interest among our client base has been robust and early feedback is extremely positive. With the addition of Paycor Smart Sourcing, our full suite of solutions is $44 PEPM and is the most comprehensive HCM offering available in the SMB market..

Our platform's modern architecture enables rapid integration of point solutions such as Talenya that provides deeper functionality than traditional suite providers. With nearly 90 different public API end points available to power integrations, Paycor offers the most modern interoperability solution with a broad array of partners for our clients..

We are incredibly proud Paycor was distinguished as a Top Workplace USA by Energage for the third year in a row. Energage's Top Workplaces program has a 15-year history of surveying over 20 million employees to help build and brand top workplaces.

Results are based on 15 cultural drivers that are proven to predict high performance against industry benchmarks. This award underscores our commitment to exemplify the cultural best practices that impact associate engagement and business performance. .

Let me close by reiterating how confident we are about Paycor's outlook. The labor market remains tight as nonfarm payrolls continue to increase, job openings are at elevated levels, and workforce participation remains low.

Modest changes in unemployment or job openings are unlikely to materially impact our business as most of our revenue growth is derived from new business, and the market is still in the early stages of adopting modern cloud-based HCM solutions.

Furthermore, HCM is highly defensible as our value proposition is mission critical to attracting, paying and retaining great talent while also driving a compelling return on investment for our clients. .

Lastly, I would like to thank all Paycor associates for their efforts through this calendar year-end, especially our implementation, support and success teams who, during our busiest time of the year, provided an amazing year-end experience for our clients..

With that, I'll turn the call over to Adam to discuss our financial results and guidance. .

Thanks, Raul. I'll discuss our second quarter results, then share our outlook for the third quarter and fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis..

We had another strong quarter, delivering total revenues of $133 million, up 29% year-over-year and recurring revenue growth of 22%, marking the fifth consecutive quarter of 20-plus percent revenue growth.

We exceeded the top end of our revenue guidance by 4% and significantly outperformed our adjusted operating income guidance as we continue to scale the business. .

The majority of revenue growth continues to be from new business wins. 90% of our revenue is derived from companies with between 10 to 2,500 employees, where we continue to see outsized growth.

Effective PEPM increased 11% year-over-year, which includes cross-sell as well as pricing initiatives such as the conversion of our clients to our latest product bundles, and it also includes the impact of higher bundle adoption at the point of sale.

In addition, we're pleased with the progress we're seeing across our partner program as we continue to expand our interoperability platform. .

The number of employees on our platform increased to more than 2.3 million, up 9% over the prior year, and we exceeded 30,000 customers. Our average customer size increased to 78 employees at the end of Q2, up from 74 in the prior year as we continue to focus our resources in the mid-market with clients above 100 employees.

However, on a sequential basis, organic customer growth has been essentially flat, following strong growth earlier in calendar 2022..

As we shift our portfolio upmarket, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increased 11% year-over-year. And net retention continues to trend favorably..

Adjusted gross profit margin, excluding depreciation and amortization, improved to 77.9%, an increase of about 1.5 points year-over-year as we continue to scale the business. Sales and marketing expense was $42 million or 32% of revenue, comparable to levels a year ago.

We continue to strategically expand our sales teams and marketing programs, primarily in Tier 1 markets. We like the current level of spend and continue to evaluate investments to ensure that they will deliver an attractive return, but we have the flexibility to quickly pivot if we were to see a change in the demand environment..

On a gross basis, we invested $23 million in R&D or 15% of revenue, a similar level to last year and in line with our long-term targets. We continue to focus on efficiently enhancing our modern platform to deliver on our leader strategy, whether it's through organic development, partnerships or acquisitions..

G&A expense was $19 million or 14.5% of revenue, down 1.5 points from 16% in the second quarter of 2022. We intend to progressively drive G&A down as a percentage of revenue as we scale the business..

While we continue to focus on building a sustainable 20-plus percent revenue engine, we are also steadily expanding margins as we scale the business.

This quarter, adjusted operating income increased to $18 million or a 13% profit margin, up more than 300 basis points from the 10% last year, even while continuing to expand investments in sales and marketing and R&D..

Shifting to the balance sheet and cash flow. This quarter, free cash flow was a $3 million spend compared to a negative $7 million last year. We remain on track to deliver on our plan to be free cash flow positive for the full fiscal year. We closed the quarter with $72 million in cash and no debt..

Turning to client funds. This quarter, we generated just under $8 million of interest income on average client funds of about $1 billion, an effective rate of just over 300 basis points..

In terms of our outlook for the second half of the fiscal year, we remain optimistic on the HCM demand environment. Our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent and flat organic employee growth among existing customers for the balance of the year..

For the third quarter, we expect total revenues of between $155 million and $157 million or 28% growth at the high end of the range and adjusted operating income of between $35 million and $36 million. For the full year, we expect revenues of $539 million to $545 million or 27% growth at the top end of the range.

And we anticipate adjusted operating income of $75 million to $78 million..

With respect to interest income, we expect our effective rate to increase marginally in the third quarter to about 330 basis points. At today's rate, we expect interest income will be in the range of $28 million to $30 million for the full year on average client fund balances of just over $1 billion.

We still plan to reinvest a portion of interest income as we've discussed this year to accelerate our product road map and expand our marketing programs and invest in infrastructure. However, we will look to drop any incremental interest income beyond that to the bottom line, which will increase our full year outlook on margin and cash flow..

Overall, we're pleased with our strong quarterly performance and ability to raise guidance again. We've driven increased profitability 3 consecutive quarters. Our differentiated platform focused on leaders continues to win in the market.

As a mission-critical application, we believe in the durability of the category and our opportunity to continue capturing share with the expanding $32 billion HCM market..

With that, we'll open the call for questions.

Operator?.

[Operator Instructions] Our first question today is coming from Gabriela Borges from Goldman Sachs. .

Raul, you mentioned all of the ways in which your business continues to perform in this environment, so I figure I'd ask the question directly.

Are you seeing any negative impacts or offsets because of the macro?.

To date, we haven't seen any changes in our overall demand environment. Things have been fairly consistent. And they've been fairly consistent across all of our sales segments. So to this date, we've seen strong demand. .

Gabriela, the one thing I would say is that we've just seen a little bit more softness in that organic customer growth in that sort of micro segment, really small segment, under 20 employees. Besides that, there's really nothing else that we're seeing. .

Excellent. The follow-up that I have is on how you're thinking about normalized growth. I know that very consistently now you've been doing north of 20% recurring revenue even on more difficult comps.

So how do you think about potentially getting to 25%? How do you think about potentially accelerating your hiring further? Are there puts and takes that could potentially put you back down to 15% that are out of your control? So just a little bit more on how you think about normalized growth. .

Yes. I mean the way that we think about it is that it's about the broader demand environment, our ability to grow the sales organization at pace and do it well so that we continue to drive the profitability and the overall return out of that investment across the sales channel.

And we feel like there's sort of a natural limit in terms of that 20%, 25% headcount growth, which is what we've been targeting for the last couple of years..

And so as we think about our ability to grow faster than that, we just haven't seen -- we've seen that operationally it's just a little bit more complex, so there becomes a point of diminishing returns.

And I think that there's -- so in that 20% plus range for us right now is where we feel comfortable in terms of building that sustainable sales engine to drive that growth..

And then the opportunity will be to continue to expand that sales organization and the efficiency of that spend even further. So the way that we talked about it a couple of years ago and over the last 2 years now has really been about being consistent in the sales execution, developing this engine in this flywheel that can continue to grow.

And so it's just about continued execution over the next couple of quarters to stay above 20%, I think. .

Yes. The other dynamic, Gabriela, is that we'll continue to add PEPM along the way. So we really think about it as 2 key components to drive consistent, sustainable long-term growth as our ability to continue to add sales headcount and our ability to continue to expand our PEPM and our average deal size.

And so we feel confident we've made great progress moving into the 20-plus percent range, and we're going to continue to execute and focus and obviously, we want to continue to improve our performance over time. .

Next question today is coming from Samad Samana from Jefferies. .

So maybe first for Adam or Raul, either one. Just the effect of PEPM growth of 11% year-over-year, really strong. I know you mentioned a few factors, Adam, such as higher bundle adoption and good cross-sell.

But I'm curious if you could maybe help us think about, in the quarter, which of those factors had the greatest contribution and if that's any change from what you've seen in the last few quarters. .

Yes. I mean what we see is that it's really the combination of 3 key things, like we mentioned, right, the conversion in that subscription bundle. We see higher adoption at the point of sale, and we see pricing initiatives as well that go into that. And I would say it's sort of a combination of all 3.

Each quarter fluctuates a little bit depending on the initiative that's going in. But broadly and over the last couple of quarters, it's been fairly consistent, close to 1/3 across each of those items. So there's not one item that necessarily sticks out, one of the other.

It's been pretty consistent, and we've seen really good execution across those 3 dynamics. .

Great. And maybe, Raul, for you. It sounds like hiring is -- for sales is on track to what you're expecting. Maybe could you touch on that.

And just sales productivity, how is that metric trending, especially as you onboard more and more at a larger scale?.

Yes. So hiring has been really strong. Retention has been excellent, which has really helped us to get into a really solid [ asking ] perspective. And productivity, as we would expect, our new people produce at a lower rate, and they slightly drag down the overall productivity based on the outsized hiring.

But by and large, our tiers are operating as we would think from a 10-year perspective, our first year bucket or second year bucket and then beyond 2 years. So we feel really good that the flywheel is working. We're onboarding people successfully, and we're focused on execution. .

Next question is coming from Bhavin Shah from Deutsche Bank. .

It's [ Nick ] on for Bhavin this evening. Congrats on the strong quarter. Looking back on new sales in the quarter, was there any change in composition of those deals, say, in either size, industries or modules bought? And -- yes, start there. .

Yes. Thanks, Nick. I would say, again, we had consistent results across all segments. I would say that we saw stronger results above 500 employees than traditional. So the product's really shifting, and we're seeing a lot of traction upmarket, which is newer for us than maybe others. And that's the primary dynamic that we saw this quarter.

I mean, essentially, all of our segments are operating as designed and we saw a little more take in that 500 space..

From a module perspective, talent continues to fly off the shelf, and we're seeing high attach rates. And we actually charge for it. So it's been a great opportunity for us, and we're really excited about it. It's differentiated, and it's winning in the market. .

Great.

And then just with the success of some of the sports partnerships that you've had, how are you thinking about your marketing investments going forward?.

Yes. From a marketing perspective, obviously -- so the sports partnerships have provided some great air cover. We're getting significant awareness, and it's really been a positive for Paycor as a whole and helping us as we expand nationwide.

I would say we're continuing to focus on all facets of the marketing engine and really looking to continue to help streamline entry into all these new markets. And so we're really focused on connected TV and driving ads through that. We're focused on continuing to increase our traffic online..

And so I think all of those things are helping drive top-of-the-funnel awareness. We're seeing record impressions, record traffic to paycor.com and record leads.

So we feel really good that the actions that we've taken and the marketing team has done an amazing job driving brands in these big relationships and making sure that we're maximizing our ROI on them. .

Next question is coming from Terry Tillman from Truist. .

I guess the first question is just, Raul, I think you said in your prepared remarks that it was a record bookings.

Is that for 2Q? Or is that for any quarter?.

It was a record for 2Q. .

Got it. Okay. And I was curious about Tier 1 markets. Any specific call-outs, whether it's kind of TFC markets, Texas, Florida or California or any other Tier 1 markets that kind of stand out in terms of kind of where you are versus what your expectation was? And I'm curious in those markets since you've had some time now.

What are win rates and new seller productivity like in those Tier 1 markets versus your traditional sweet spots?.

Yes. So we've seen significant growth, over 100% growth in L.A., San Francisco, South Florida, and the D.C. marketplace. So those 4 are stand out for us. And as a whole, our win rates for our new sellers are on par with the win rates for our overall sales organization.

So the sales operations team is doing a fantastic job of getting people up to speed on our value proposition and enabling them with the tools required to be successful out of the gate. So that's a real positive component for us. .

Next question today is coming from Bryan Bergin from Cowen. .

It's actually Jared on for Bryan tonight.

In terms of year-to-date net revenue retention performance, how does that compare year-over-year? And in terms of your FY '23 guide, is that embedded change relative to FY '22?.

So the net retention has been performing well. I would say it's been fairly consistent quarter-over-quarter. It's been trending well.

And yes, Q1 of last year, while any 1 quarter isn't necessarily a good metric here on net retention, Q1 of '22 actually was rather low for us as we were going in and sort of coming -- growing over some of the COVID challenges. So on a year-to-date basis, it's technically up, but it's been really consistent over the last, call it, 5 quarters now.

So we feel good about the net retention, and of course, our expectations around that are included in our guide. .

Okay. Great.

And then in terms of the calendar 1Q form filings, are you expecting a year-over-year tailwind related to the form filing activity and anything different there in the compare this year either quarter-on-quarter and year-on-year basis to be mindful in terms of that outlook?.

Yes. I mean I'd say that it's looking like it's going to be fairly consistent with where it was last year. We were wondering if we were going to see a little bit of an acceleration, but it's been really consistent with where I would sort of expect it to be from pre-COVID levels. So it looks like it's normalized well.

And I think that it's driven more dynamically by overall employee retention, right, for our customers, our customers' employees' retention, which has been maybe a little bit more consistent this year and back in line with pre-COVID levels.

So nothing -- I don't think that we would expect anything to look different as it has materially from any of the prior sort of pre-COVID years. .

Next question is coming from Scott Berg from Needham & Company. .

I guess I have a couple. First of all, payroll and HCM in general, at least demand for these solutions kind of on all customer segment level seems to be holding up extremely well today and much better than the other software segments that I think that most of us on this call cover.

As you look at the -- kind of what's going on under the covers, any idea why, in particular, today is just great HCM environment versus others that are seeing that softness?.

Yes. I think a couple of things. One is it's like, from a view of your other software companies you cover, we're not a land and expand. So there's not any requirement or expectation that you're going to add more seats, so to speak. That's one.

Secondly, I think the category as a whole has changed over the last decade, and it's really added some really powerful modules around recruiting, around attracting, around retaining employees. And so in this hyper tight labor market, I think that's been a big driver of accelerated demand. .

Secondly, cloud solutions and HCM kind of lag behind the adoption rate of some other solutions that you would cover. And so we didn't have this explosive demand out of the gate, and I think COVID has really helped open up the eyes to people that buy our solutions that HCM in the cloud is something that can be helpful to their organization..

So I think the combination of the cloud acceptance in our category, the additional modules that we're adding that are helping other facets of the organization outside of traditional finance or traditional HR have really made the solutions more powerful and more attractive.

And again, the 3 modern players in our space combined have somewhere between 8% and 12% share, so there's a really big pie of legacy solutions still available for us to continue to convert over to a more modern solution. And I think that's why you're seeing really strong demand across the board. .

Got it. Helpful. And then from a follow-up perspective, you mentioned your sales hiring is on track and you've already achieved the low end of your range.

As you look at the placement of those individuals this year, I know Tier 1 cities have been the focus, but these hires, are you looking at putting them in maybe different geographic locations or customer segments than what you were 6 or 9 months ago? Just seeing if there's any slight change to your strategy relative to the current demand trends you're seeing.

.

No. I mean we're still really focused on -- the majority of the people we're hiring are focused on what we would call 50 to 1,000 segment, 50 to 2,500.

And yes, we have pockets where we have reps that are focused on 250 employees and above, but ultimately, we're still in the early innings of coverage in the fact that we're still -- while we cover the entire market, we have opportunities to continue to add.

We have opportunities to nearly double our current sales organization in order to secure what we would consider optimal coverage..

So we have a long runway to go. If we want to add heads, we can continue to do that. And we'll look at different designs, Scott, whether it's 50 to 250 or 50 to 2,500 or 250 to 2,500. There's a lot of different ways and markets to look at it, and you don't want to be robotic in your approach to the market.

So we'll look at all different options, and our objective is to maximize our LTV to CAC. .

Next question is coming from Brian Peterson from Raymond James. .

Just one for me. It's actually a bit of a follow-up to Scott's question, but there's a lot of metrics that you have given in terms of PEPM and growth in bookings and everything else. But I'd love to understand how the pipeline looks.

And if you look at kind of those embedded opportunities in the pipeline, like what are you seeing in terms of the PEPM and the module adoption? I just kind of love to understand what you're seeing in terms of the opportunities that we should be expecting going forward. .

Brian, yes, I mean, when we look at the pipeline, I'm not sure that it looks any different than what we've seen historically. And I think the big thing, of course, is everybody buys payroll. Everybody gets the sort of HCM Cor platform, that's Table 6 now and part of that bundle adoption at the point of sale that we've been talking about.

And then we continue to expand our talent suite. Now with the addition of Paycor Smart Sourcing and the Talenya acquisition, it's going to continue to expand that talent suite. And we're already seeing interest and really strong demand around that solution, really early days..

So I think that's where we're seeing a lot of growth. We're seeing a lot of growth in the portfolio come from talent.

We continue to see our enterprise segment and the larger end of our customer segment looking for more talent solutions, which continue to drive that ADS up and continue to drive PEPM up where the payroll historically has been a lower part of that rate.

So I think that's what we see, the same thing inside of pipeline, excuse me, is that, that continues to grow with more and more customers looking for talent solutions. .

Next question is coming from Patrick Walravens from JMP Securities. .

This is [ Owen ] on for Pat. Congrats on the strong quarter. So I was interested in the interest income line and I guess, what was the -- what the mix was of investment back into the business versus straight to the bottom line previous to all these interest rate hikes. .

Yes. So when we were going into the year, we were expecting something in that sort of $12 million range, $12 million growing to $24 million. And we were targeting about half to -- looking to spend about half of that at that $20 million to $24 million range.

And I think that there comes a limit where we just simply can't consume more or we don't like what the returns look like for that incremental investment. So we've been targeting about half, meaning that we would be maybe in that $10 million to $12 million range on a full year of investment or reinvestment of those interest income funds.

And I think that's probably where we're going to end..

So as we look at the increase to 30 in this case, we're not necessarily looking to -- I mean, we'll look for opportunities to invest it, but I don't think that we're going to see the opportunities that we're looking for. And so that will sort of naturally fall down. .

Next question today is coming from Andrew Warren from D. A. Davidson. .

I was just curious how cross-sell is doing with additional modules to existing customers, if you had seen success there. And then kind of along with that, if you're seeing any success in getting price increases through. .

Yes. On the cross-selling side, we continue to have strong success with our client sales team selling additional modules into the base. Obviously, they're really focused on talent as a primary driver. And so we've seen strong growth there. And we're going to continue to grow that team thoughtfully over time.

And the team continues to play a big contribution to our overall growth, and we're excited about where we are with them. As far as the pricing goes, I'll let Adam walk you through that. .

Yes. We try to be really intentional about those price increases and make sure they follow the value that we continue to deliver for customers around either additional functionality or features and service. And so we've invested in lot incremental product.

We've released a lot of product and developed a lot of great features that we've released to our customers as well as invested pretty heavily in our service and support organizations..

And so we've been able to see pretty good take on those incremental price increases that we've been able to put into the portfolio. And of course, we're really intentional with it. We don't want to be jumping out constantly with them. So it usually takes a couple of years before a client comes in before we look at price increases.

And since the portfolio is growing quite nicely with a lot of new customers over the last couple of years, we've been able to revisit those prices pretty regularly. .

Next question is coming from Steve Enders from Citi. .

I guess I want to ask a little bit on the verticalization strategy and how that's been resonating in the quarter.

Anything to call out that's all particularly kind of from bookings [ instruction ] here?.

Yes. So from a bookings perspective, as you think about it is slightly over 50% of our mix is coming from the 4 key industries. For a little flavor, I would say we had really strong results in professional services, and food and beverage and accommodations this quarter. And I would say healthcare kind of was a little lagging behind this quarter.

They're obviously growing over tougher comps from the previous years..

But that's how I would think about the industry. We're really excited about the progress we've made. We continue to invest into product differentiation and tools for implementation for our clients, so we can easily customize the tool for them for their specific industry. .

Okay. Got you. That's helpful. And I guess just a housekeeping question just on the Talenya acquisition.

I guess what was kind of the impact in the quarter from a rev contribution? And what's kind of embedded in the outlook there going forward?.

Yes. It's really immaterial to the P&L. So we see -- it's like well less than 1% of our overall revenue for the year, well less than that. So it's really more about the fantastic technology and getting that into our platform and how we're going to be able to take that to market through our broader suite. But there's almost no impact to our financials. .

Next question today is coming from Pat Walravens from JMP. .

Congratulations. Pat for Pat this time. Raul, as a follow-up, it caught my attention when you reeled off 3 metro areas that we're doing particularly well. I think L.A. was one of them. Like taking L.A. as an example, like what would make L.A.

a place where you see particular success? What are some of the characteristics that would drive that?.

Yes. I mean I think it's overall business density, obviously, critical. The fact that we have continued to grow our sales team there and this is what we're entering the third year. So we're starting to see that tenure build up in the marketplace.

And when you add a really large dense marketplace that's been saturated on legacy solutions that are just looking for something modern, as we've entered there, we've seen a lot of strong success. .

And you said this was year 3?.

Yes. We really started in '21, and this will be our third fiscal year. We're about 2.5 years in. .

Yes. So I mean what I'm getting at here is sort of the longevity of this growth trajectory you're on, right? So how many L.A.

types or big metro areas are there out there where you feel like you guys are just getting started?.

Yes. I mean, so if you think about it, there's -- we really manage the 50 metro markets. We break them into Tier 1, Tier 2 and Tier 3. And I would say Tier 1, which is the 15 largest, which includes L.A. and San Francisco and Miami, I would say we're in the early innings. We're about 1/3 of the way there..

And when you think about Tier 2 markets, which are the next 15 biggest cities in America, we have, again, tons of opportunity to continue to expand. We're slightly more covered there. And so for us, it's a long runway of continuing to add headcount but also seeing that headcount mature through the tenure cohort and continuing to drive productivity. .

Our next question today is coming from Mark Murphy from JPMorgan. .

I'll add my congrats. I was wondering, first off, if you can speak to the trend you're seeing with your own real-time pay solution. I believe that one is a third-party solution called Payactiv.

Anything just in terms of what percentage of payees in your system are using it? Or how much revenue is flowing around between Paycor and the third-party provider there?.

Mark, while we see good adoption or sort of continuing growth in the adoption, it's still just overall -- I mean, the materiality is -- I mean, it's immaterial in terms of its impact on the revenue.

So I think that we're expecting that this build is going to take years to get it to a point where the card economics are really enabling any sort of real revenue impact..

When we see clients adopt it, you usually see a couple of employees in a company using the card, and then it takes some time for them to really start to get into actually using it somewhere that drives card economics.

What we see most of the time is that clients are -- or employees are downloading it to their own pay card or they're taking the cash out right away versus using it on the card. And so the economics just sort of occur a little bit differently..

So with that in mind, I mean, I just think that it's going to be a long runway to revenue there. I think the benefit is in terms of it's a benefit to our customers to be able to enable for their employees, and so the customers feel good about it. There's not a huge cost to their employees.

And so it's a benefit that they can provide their employees that really just continues to give -- it becomes table stakes almost because we put it into the core offering and a lot of the competitors do, too. But I don't expect it to be material to revenue for the foreseeable future. .

Okay. But Adam, if I understand the way you're describing that, there is some interesting percentage of payees that are kind of taking their cash out more often than the twice-a-month basis.

I mean is that a fair way to think about it, right, whether they're taking cash out right away versus using it on the card?.

Yes. Yes, absolutely. I mean there's definitely people using it for sure. It's a benefit to associates for sure. .

Yes. Okay. And then, Raul, regarding the focus that you've had for a long time now on the leaders within an organization, I'm interested in whether that is resonating perhaps in some new and different ways just because of this unique type of environment that we have, where unemployment, I think, is at a 50-year low, wage inflation is so high.

I mean companies must have sort of a heightened interest in how they're leading, how they're managing, how they're retaining the workforce.

Is that something that is kind of tangibly different for you in this environment?.

Clearly, talent is one of the biggest reasons why we win and our win rate is so strong. And we continue to invest in opportunities, whether it was goal setting or most recently with smart sourcing to help leaders find and source new employees faster.

And recently with our COR Leadership Dashboard, really helps leaders understand where they are, how their employees are viewing them from a coaching perspective, from an optimization perspective.

Are they making them better? And then are they engaged? And are they going to stay longer?.

And it really provides people real-time feedback from their associates in order to be a better leader. And so obviously, we believe that leaders drive associate engagement and associate engagement drives overall productivity for our clients. And if we can continue to help deliver that for our clients, they're going to be more successful.

And so people are definitely resonating to the message. And so we're excited about where we are. And we're going to continue to add more differentiated tools for frontline leaders to help them be more effective. .

Next question is coming from Mark Marcon from Baird. .

Congratulations. Wondering if you can talk a little bit more about the strong success that you're having with the employers that have more than 500 employees.

Is there any difference in terms of the sales strategy in terms of how you've targeted people? What is really standing out that's helping you in the upper end of your market?.

Yes. I think it's a combination of things. Obviously, as we put more focus on those prospects from a sales perspective, we're going to get more [ at that ]. The product itself, over the last few years, has significantly added feature functionality, where we're differentiated from our peers, and we believe we have the most robust solution in HCM.

And our PEPM would demonstrate that. So ultimately, I think it's the feature functionality, the ease of use of the platform and our robust talent tools that are driving success in that 500-plus market so far. .

That's great. And then you did talk a little bit about your AI recruiting capabilities and Paycor Smart Sourcing.

Can you talk a little bit about to what extent that's helping, particularly with a tight labor market and what you view from a longer-term perspective, the implications of generative AI like ChatGPT and the technology that is leaping forward in terms of -- both in terms of how you service your clients but also additional features and functions that you could provide?.

Yes. I mean Paycor Smart Sourcing is amazing technology and an amazing addition to our portfolio. And we've already had clients in beta, and we've already sold over 100 clients on Paycor Smart Sourcing in less than 45 days. And so we're excited about the prospects. People see the value. It's a timesaver.

And it essentially -- instead of asking a frontline leader to kind of view through hundreds of LinkedIn profiles or resumes stacked on their desk, we do that work for them through AI and provide them a list that they should start with first..

And so it's a home run, and we're really excited about it. And we're going to continue to see more adoption. On our next call, we're going to be really excited to share the results. I'm really confident about that..

I think AI, in general, there is tremendous opportunity across the entire HR platform to leverage the data that we have to provide insights to our customers. So that's one our product team is continuing to evaluate and work on.

And obviously, the team that we acquired with Talenya are experts at this and will help us think through our long-term strategic planning about how to leverage AI across the other modules of our platform..

Internally, obviously, there's plenty of opportunities to use that kind of functionality to improve the user experience, whether it be through -- essentially, we already have chat with a person, and now you can have chat without a person.

And so it's not a be-all, end-all solution by any means, but I think it's part of a future employee -- user experience that will help separate Paycor from the rest. .

Next question is coming from Jackson Ader from SVB MoffettNathanson. .

This is [ Kyle ] on for Jackson. Just a quick one. I think, Adam, you had mentioned that there was no material change in labor or demand environment factored into your guidance.

But in terms of the $30 million float for the full year, does that take into account any future rate hikes? Or is that kind of just where we are today?.

Yes, it's based entirely on where the rate environment is today. So yes, any increase in rates going forward would mean there's additional upside. .

We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments. .

Thank you again for joining us tonight. We're encouraged by the momentum in the Paycor business and remain laser focused on executing our strategy. We look forward to connecting with many of you over the next few weeks, and we wish you all a great evening. Good night. .

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today..