Craig Boelte - Chief Financial Officer Chad Richison - President and Chief Executive Officer.

Raimo Lenschow - Barclays Capital John DiFucci - Jefferies & Co Mark Murphy - JPMorgan Brad Reback - Stifel Nicolaus Corey Greendale - First Analysis Mark Marcon - Robert W. Baird & Co. John Byne - UBS Ryan McDonald - Wunderlich Securities.

Good afternoon and welcome to the Paycom Software First Quarter 2016 earnings conference call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please also note, this event is being recorded.

I would now like to turn the conference call over to Mr. Craig Boelte. Mr. Boelte, please go ahead..

Thank you and good afternoon. Before we get started, I would like to note that certain statements made during this conference call that are not historical fact including those regarding our future plans, objectives and expected performance are forward-looking statements within the meaning of the Private Securities and Litigation Reform Act of 1995.

These forward-looking statements represent our outlook only as of the date of this conference call. While we believe any forward-looking statements we have made are reasonable actual results could differ materially because of statements based on our current expectations and are subject to risks and uncertainties.

These risks and uncertainties are discussed in our filings with the Securities and Exchange Commission including our quarterly report on form 10-Q for the quarter ended March 31, 2016 and our annual report on Form 10-K for the year ended December 31, 2015. You should refer to consider these factors when relying on such forward-looking information.

Any forward-looking statements speak only as of the date on which it 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 note during the course of today's call we will refer to certain non-GAAP financial measures. A reconciliation 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..

Thanks Craig. As we announced in our press release earlier today. Paycom enjoyed continued success in the first quarter of 2016. Our revenue for the first quarter was $90.1 million representing growth of 63% compared to the comparable prior-year period.

This was driven both by our ongoing sales success and also by strong performance in the tax form filing portion of our business, which we experience every first quarter. As many of you know, our form filing business to date has consisted of Paycom filing IRS forms W-2 and W-3 and forms 1099 and 1096 on behalf of our clients.

This year for the first time we also filed forms 1094 and 1095 as required by the Affordable Care Act on behalf of certain clients. These factors combined to generate our revenue out performance.

Craig will provide more detail on our financial performance later on the call but I'd like to highlight that the strong top line performance flowed through our income statement to generate very strong adjusted EBITDA of $33 million or 37% of revenue. This is a record level for Paycom both on a dollar and percentage basis.

I'd like to thank all of our employees for their hard work and incredible performance, they put in as part of our effort surrounding the ACA development and implementation. ACA compliance is very important to our clients and our team handled every implementation and question with great skill and care.

With that I would like to provide some more color regarding our first-quarter performance and also some comments on our view of the marketplace and expectations for 2016. Our momentum continued in the first quarter as our powerful single database payroll and human capital management solution continue to resonate in the marketplace.

As a reminder our target segment consists of companies with 50 to 2000 employees for what we term the mid market.

We believe they were remains substantial runway for continued sales growth in the segment as in our view companies in this range, are not tip really leveraging the potential of software technology, particularly within the human capital management or HCM.

As we speak with current and prospective clients we continually encounter companies that can derive substantial value and benefits from our solution. These benefits can take many forms.

Some firms can reduce expense significantly by utilizing the Paycom system to evaluate and hire candidates that could potentially generate a valuable work opportunity tax credit. Other companies that deploy the workforce and shifts can use our system to avoid paying costly overtime.

Firms looking to both develop their talent and also reduced turnover also use our learning and survey capabilities to train and engage the workforce. The key differentiator in these scenarios is that by utilizing Paycom's single database employee data flows seamlessly throughout all its applications, streamlining many HCM functions.

We believe our software solution is best-in- class and we are committed to maintaining our competitive advantage by continuing to improve our solution. And the first quarter of 2016 we once again more than doubled our adjusted R&D spend growing it 105% year-over-year to 4.2% of revenue.

Though we do not provide formal guidance in this area, we're on pace to more than double our adjusted R&D expense again in 2016 and in the second quarter of 2016 we expect it to be close to 6% of revenues. This amount of R&D spending would be double the level of R&D spending from when we went public in 2014.

We are excited that the spend is reflected in our software offering and I am pleased that the spend did not prevent us from experiencing expansion within the margin. The low penetration of advanced cloud-based HCM and payroll solutions in the mid market is a key driver to our momentum.

We anticipate that it will persist for several years as our market share even today remains small relative to the opportunity. As we measure it and as verified by third-party research firm such as international data Corporation, the addressable market for our services in the United States is approximately $25 billion.

Another key driver for Paycom, as well as, the entire outsourced HCM industry is the environment of increasing regulatory complexity.

As we observed with the Affordable Care Act and more recently with the proposed overtime expansion, the trend of lawmakers and regulatory agencies has been to continue to increase the compliance burden on virtually all companies across the US. This hits the mid market particularly hard.

These companies typically do not have the internal resources or the time to navigate these requirements. Additionally, it rarely makes sense for mid market firms to hire staff and build departments to obtain these capabilities. As the return on this investment usually pales when contrasted with investing in the core business.

It is the combination of Paycom's expertise in HR regulation and tax laws, along with our proprietary single database system that allows our clients to not just achieve compliance but obtain significant organizational inefficiencies that in turn drive very compelling ROIs.

The comp, this combination also allows Paycom to react quickly to changes in regulation and provide thought leadership and tools to our current and prospective clients. A great example of this is our overtime expansion tool, that we recently introduced and is proving to be very popular.

As many of you know the Department of Labor is expected to expand overtime protections in 2016.

Our tool allows executives to quickly determine how much the proposed the changes are likely to cost the organization and also provides employers with inflection point salary levels at which they would economically be better off raising compensation rather than paying overtime.

I want to underscore that it is the combination of our regulatory knowledge, software development capabilities and also the flexible nature of our single database platform that allowed us to react so rapidly.

The synergy between regulatory knowledge and software development is a key competitive differentiator for Paycom and something we built and refined for many years. Another key differentiator we enjoy a Paycom is our highly effective and organically built sales organization.

Our sales force is trained to identify areas where solution can be most effective for prospective clients and work collaboratively with those prospects to help them obtain the most valuable outcomes during deployment. As I detailed on our last call, we launched six new sales teams in January bringing our total number to 42.

These teams are progressing in line with our expectations and should reach maturity at the 24 month mark. These teams followed the five new teams we launched in 2015, which are also progressing closer to becoming fully mature teens.

I recently had the opportunity to spend time with our sales force that our annual Presidents club gathering, to celebrate their achievements. The mood among the sales organization remained extremely positive as our recent successes spurring the teams to reach even higher and to keep our momentum rolling through 2016 and beyond.

Now I'd like to highlight of new client wins that we one in the first quarter. These highlights are just a selection of the many new clients that joined the Paycom family and I use them as examples to illustrate the broad appeal of our solution across industries.

First, we signed a large event securities event staffing company this client has just over 3000 employees and was using a national Paycom competitor. This client loved our high touch customer service model along with the ease-of-use of our system for their employees in the ability to access actionable analytics.

Next, we brought on a transportation company with over 8000 employees. This company provides shuttle services to consumers across a large metropolitan area and was also using a large national Paycom competitor.

In addition, to needing to consolidate multiple systems this client also wanted to automate and standardized on boarding process which they have been doing manually prior to using Paycom. Finally, we welcomed a fast-growing building products company with over 2000 employees.

This client was also using a national Paycom competitor and was facing challenges obtaining the service they needed to support their growth. With the Paycom system the client now has the ability to produce analytics and real-time, that allow them to make critical decisions on labor and cut down on unnecessary labor expenses.

Our solution empowers their managers to better control labor cost on a daily basis. Because of our robust and user-friendly analytics tool. Now before I hand the call over to Craig, I want to take a moment to highlight that the journal record recently recognized him with a 2016 financial stewardship award in the public company category.

Craig, is been Paycom's CFO for over a decade. He has been an invaluable leader within Paycom for years and has been instrumental in helping guide and grow the company to where it is today. With that I will now turn the call over to Craig for an update, on our financials and our guidance.

Craig?.

Thanks Chad. Before I review our first-quarter results and also our outlook for the second quarter and full year 2016, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis.

Adjusted EBITDA and non-GAAP net income are non-GAAP financial measures that exclude stock-based compensation and other nonrecurring charges including transaction expenses related to our follow-on public offering. A reconciliation of our GAAP to non-GAAP results is included in our press release.

We experienced a strong first quarter with total revenues of $90.1 million representing year-over-year growth of 63% from the comparable prior-year period.

As Chad mentioned, revenue out performance was driven by a combination of continued strong sales growth better than expected growth in our tax form filings business and also performance from forms filings related to the ACA.

Within total revenue, recurring revenue was $88.9 million for the first quarter of 2016, representing 99% of total revenues for the quarter and growing 64% from the comparable prior-year period. I would like to now comment on the A&RR. We have decided to discontinue providing A&RR because of the limitations of this metric.

A&RR is a measure of one business is onboard, not when it is sold. This means that investors who attempt to forecast A&RR are effectively creating an estimate for a very brief period of time because of our short sale cycle, which is typically 4 to 6 weeks and our onboard cycle, which is a similar period of time.

Based on client choice and need, this creates variable start dates, which in turn leads to variability in A&RR. We saw an example of this just last quarter when we experience the pull forward of approximately $10 million in A&RR due to the ACA reporting deadlines.

With respect to the first quarter of 2016, bookings in A&RR were consistent with our expectations. Our anticipated future A&RR is reflected in both our second quarter and full year revenue guidance. Both of which are the largest we have ever provided on the growth and of course absolute dollar basis.

Total adjusted gross profit for the first quarter was $78.3 million, representing an adjusted gross margin of 87%. This compares to 85% in the first quarter of 2015. Strengthen our adjusted gross margin line was driven in part by the out performance of our forms filing business, as well as ongoing improved efficiencies across our organization.

For the full year 2016, we anticipate that adjusted gross margin will be within a range of 82% to 84%. Turning to operating expenses as a reminder we pay commission to our sales representatives, based solely on new sales at the conclusion of the client's first monthly billing cycle.

This is a one-time commission that we recoup over the life of the client relationship. When we experience strong sales performance in the quarter, there is a potential for us to see increased expenses in the quarter, depending on the timing of the clients on boarding process.

Adjusted sales and marketing expense for the first quarter of 2016 was $28.4 million. This amount represents approximately a $2 million sequential decline from the prior quarter.

This was driven by strong commissions in Q4 2015, due in part to the pull forward of certain deals into the fourth quarter of 2015 by the Affordable Care Act that we have discussed in last quarter's call. For the first quarter total adjusted administrative expenses were $48.2 million, this compares to $35.5 million in the first quarter of 2015.

Adjusted R&D expense of $3.8 million increased 105% from the comparable prior-year period as we continue to invest in our solution. Adjusted EBITDA was $33 million or 37% of total revenue in the first quarter of 2016, compared to $13.6 million or 25% of total revenue in the first quarter of 2015.

Adjusted EBITDA was positively impacted by the commission expense trend, I mentioned earlier, as well as, the strong forms filing revenue.

Non-GAAP net income for the first quarter of 2016 was $19.4 million or $0.33 per diluted share based on approximately 58.4 million shares versus $6.7 million or $0.12 per diluted share based on approximately 56.6 million shares a year ago.

The effective tax rate was 35% compared to 41% in the comparable prior-year quarter, primarily due to the ability of the section 199 deduction and the R&D tax credit. Turning to the balance sheet we ended the quarter with cash and cash equivalents a $72.1 million and debt of $25.6 million.

As a reminder this debt represents the financing of our corporate headquarters. Cash from operations was $29.9 million for the first quarter reflecting our strong revenue performance and profitability of our business model. With that let me turn to guidance for the second quarter and for fiscal year 2016.

For the second quarter of 2016, we expect total revenues in the range of $69 million-$71 million representing a growth rate over the comparable prior-year period of approximately 43% at the mid-point of the range.

We expect adjusted EBITDA for the second quarter in the range of $14 million-$16 million representing an adjusted EBITDA margin of approximately 21% at the mid-point of the range.

For fiscal year 2016, we are increasing our guidance for revenue to a range of $320 million-$322 million or approximately 43% year-over-year growth at the mid-point of the range.

We are also increasing our full-year adjusted EBITDA guidance for fiscal year 2016 to a range of $73 million-$75 million representing an adjusted EBITDA margin of 23% at the mid-point of the range. With that, we will open the line for questions.

Operator?.

[Operator Instructions] Our first question today comes from Raimo Lenschow from Barclays. Please go ahead with your question..

Hey. Thank you for taking my question and congratulations for a great quarter. Going back to Greg and Chad for the A&RR, I totally get the logic it's a volatile, as we saw in Q4. Is there any other way you think we should look at the business in terms of going forward? And then, that's the first question.

And the second question is can you help us understand how much of the special effect you get from ACA and the tax filing. Was there anything special that will not be there next year, or is it like you are doing more now, which basically is showing up until next year? You will have a very similar situation? Thank you.

Thanks Raimo. This is Chad and I'll go ahead and take the last question first. As far as ACA everything we bill a client for as it relates to ACA is either recurring on a monthly basis, or it is recurring on an annual basis. But all the revenue is recurring.

And so we would expect to experience similar forms filings at the same type of view next quarter. As next year for the same quarter in 2017, so those will recur. As it relates to A&RR this was a metric that, really, we almost last quarter were thinking about not providing it due to the volatility that we experience.

Last quarter was going to be anywhere from 48% to 97%, depending on the Pull Forward starts, which we indicated was $10 million at the time. That anomaly, due to the earlier starts in the fourth quarter, not only impacted our fourth-quarter comp, which we did talk about. It impacts first quarter of this year, depending on that Pull Forward.

And then it impacts fourth quarter of this year as we head into that. And it will also impact 2017. And so, as we looked at that, we looked at A&RR becoming really less useful.

Because we were either going to have to explain more and more clients starts and how that changes throughout the year or are we going to have to start breaking out how much of it is one thing versus another. Another piece of our A&RR as we look forward, it is a commission number. So there are those items that we commission on.

Over time there might be additional revenue items that we add within our platform, that we don't necessarily commission on. And that would be another area. I will remind as I know you know Raimo, A&RR is also included in the guidance. And as far as modeling I do think were as far as what I would direct people to, and what we see as being important.

Sales office openings and those that are both ramping to maturity, as well as, those mature offices. We've been very consistent in how those offices have grown over time and how those offices have become mature. And we look forward to continuing in that strategy..

Perfect. Thank you. Well done..

Thank you..

Our next question comes from John DiFucci from Jefferies. Please go ahead with your question..

Thank you and I'm sorry. I'm going to ask follow up to both of Raimo's questions. Can you tell us what the impact of the ACA related tax form filing was this year, so we can look at the year-over-year impact it had for this year relative to next year, so we can size that? And then I have a follow-up..

We haven't broken out specifically the ACA forms filings. Obviously we have done less ACA form filings than what we do our normal forms filings. So there would be some type of percentage of that. We do believe that most of the clients that are with us that are eligible for ACA or should be required to file ACA are on that platform right now.

And so I wouldn't expect we would necessarily see huge growth relative specific to just ACA next year, as being proportionally different than forms filings that we have. But we haven't broken that out separately..

Okay. Because we could estimate what that is and we have. But you can't just give us - because I'm thinking the year-over-year growth was significant. I do want anybody, I don't anticipate modeling this going forward in the year because it's a big impact in this quarter….

So one thing I did say previously on the call last quarter, which I wouldn't - from where I sit today, I wouldn't make any changes to this comment - and that as we would expect ACA-related Billings for this year to equal low single digits, as a percent of our overall revenue for 2016, if that helps..

Okay. Thank you. And if I could on the A&RR Chad, I understand why you are doing this. I think we all do. But to abruptly stop giving us the metric raises a lot of questions. Especially - and you give some good reasons why sales and marketing expense was down this quarter, and certainly down as a percentage of total revenue.

But you can also come to other conclusions, too, as you might have given that, as sales and marketing expense is tied to commissions.

And perhaps - can you give us any kind of subjective information even around A&RR in this current quarter to bridge us instead of stopping it unexpectedly?.

I do think if you were able to look at our guidance to second quarter that would suggest a level of A&RR. I can answer it this way. We still are selling the same way we have always sold. Our salespeople woke up today and they are selling as much and more than what they have sold in the past. We have more mature sales teams than we've had in the past.

Our pipeline is a strong as it's ever been. Our value proposition is very strong. We put a lot into R&D. We expect next quarter R&D's going to be close to 6% of revenue, and as you know on the call we started off as a company IPO of 3%. So we've done a lot to really impact everything.

I understand that what some people might see as an elimination of a metric that we felt that over time has become, I think, somewhat less informative. And then with the anomalies we have had come in become more difficult over time to explain and make sure that everything is in the right quarter.

Because, again, with A&RR you can have a client start on March 8 and because they are a biweekly client, they go into second-quarter A&RR, and then you can have the same client start on March 8, and because they are a semimonthly client they go into first quarter A&RR. So there's a lot of anomalies that come up with that.

And we feel like we've got a strong future here and we want to focus on what's important. And we believe that is sales office openings. We believe that's sales teams that continue to mature much further past what we had anticipated in the past - and we're looking forward to continuing that strategy..

Okay can you tell us if A&RR grew this quarter? We know there's a Pull Forward last quarter of $10 million into the fourth quarter from the first quarter. So I anticipate you didn't get the kind of growth you had seen anywhere near that -.

I don't mind sharing with you that A&RR grew without the Pull Forward..

Okay. Without the Pull Forward. I'm sorry does that mean -.

I am saying, even if we do not include the $10 million Paul Forward A&RR grew, as reflected in our second-quarter guidance..

Okay, cool. Thank you very much….

Now with a $10 million pull forward, it would have been another record piece. But again we're trying to move away from that metric.

I totally understand, Chad, but those last comments are very helpful. Thank you very much..

You bet..

Our next question comes from Mark Murphy from JP Morgan. Please go ahead with your question..

Yes, thank you very much and I will add my congratulations. Chad, I wanted to ask you when you look at your recent new client wins, on average can you help us understand how many disparate systems is the customer unplugging when they go to install the take home system.

I think I'm trying to understand how often are you seeing really a one for one swapout of the payroll system versus, I think, more frequently you are displacing payroll, maybe also talent management, may be some expense management or a cobra product or something else.

And so, on average, what is that you are seeing there recently?.

No. I obviously couldn't update an average to be accurate without going through all of the data of those clients that we have recently onboarded. But it would be extremely uncommon, and as a matter of fact, I don't know of the situation where we didn't at least replace three or more.

Now weather that is another product that someone actually bought, or potentially in the midmarket you can have clients that have deployed an access database with other information in it that they use. Maybe they have hooked Crystal reporting, or another type of Cognos, or reporting tool within their database, as well.

So, when you were talking about replacing multiple systems, there's a lot there we could look at..

Okay, great. And I wanted to ask you, as well, what are you experiencing in terms of what I think sometimes people refer to as the acclamation and the usage of the products. The dynamics that keep clients engaged and keep them sticky and driving the retention rates.

So for instance, are you seeing greater adoption of the new products, like learning or the GL Concierge are some of the newer products at the time a contract is being signed?.

Yes, I mean, we definitely - let me answer it this way. We've gotten a lot better at onboarding clients to increase usage from the beginning. We find that often a client buys for the full value proposition and that might not have, even though they might have everything, they might not have used everything in the beginning.

And I think it's important that clients get what they pay for, and they are using everything. And obviously a usage increase retention, as well as it just makes it easier for everyone else to use the product; specifically their employees.

And so that's the way we look at it, and we have experienced a greater client usage, and greater competence, client competence in the product recently, and as we move forward. But that's a strategy, a very specific strategy for us that we've undertaken, as something that's being very important..

Okay great. I wanted to also go back to an earlier comment. You did say briefly a moment ago that the pipeline is a strong as it's ever been. So I just wanted to drill into that. Can you provide any more color or any more texture in terms of what you are seeing? Are the sales teams maturing more rapidly than in the past? I'm curious based on that.

Like you said, I think we can back into a feel for ANRR, even bookings, by looking at the Q2 guidance, which is quite strong.

But is your gut feel that the new bookings trajectory would be pretty healthy here going forward?.

Obviously, we do not guide bookings. We are not guiding to A&RR. But my comments are more geared toward this. We now have 42 cities open. We had five more mature in first quarter this year, because we had five that we had opened in 2014. Those are mature. We have more executive sales reps that we've ever had in the past.

Our sales teams are selling more than they've ever sold in the past. Our reps are selling more than they've ever sold in the past. In the past, we had a couple reps do a million, and then we had three or four do a million, and now we just got back several doing a million and several did over $1.5 million.

We are just seeing them sell more and more and more. And so when I'm talking about our pipeline remains strong I'm looking at each sales team. I'm seeing we have a number of sales teams. And also the growing success within each sales team continues. So, yes, our pipeline for new clients remains very strong..

Great thank you very much..

Thank you..

Our next question comes from Michael Nemeroff from Credit Suisse. Please go ahead with your question..

Hey, guys, this Alex on for Michael. Thanks for taking my question and I will echo the congratulations.

Just one if I may can you provide a general update on your strategy for new sales office openings? Should we still expect the timing to remain consistent with prior years, where you typically launch all of them in the first quarter of each year? And also as your bench of regional sales managers continues to grow, is there any chance you would step on the accelerator and open more than say six new offices next year?.

So this year was the most offices we've ever opened to date at six. Obviously there's a lot of the year left, and as we continue throughout the year we will make the decision on what we may or may not open, based on both opportunity, as well as backfill.

It's important any time we do deploy a new sales team strategy that we have great success and we've had that in the past and we look forward to continuing that. Is a general overall and what we've been consistent with is not talking about those cities that we are going to open, or how many. But it is true this was our first year to open up six.

What's also true, something you pointed out, is for the last three years we've opened them up in the first quarter. Now in years past that hasn't always been the case, and we're going to look at the opportunity as we move throughout the year and make those decisions we think will best impact us for both this year, as well as into the future.

Because as everyone knows by now, those of you who have followed us closely, it takes an office 24 months to mature. And the office openings that we have this year are going to have a substantial impact for us as they mature into 2018. As we have had five more mature from 2014 into this quarter..

Perfect thank you for taking my questions, and congratulations again..

Thank you..

Our next question comes from Brendan Barnicle from Pacific Crest Securities. Please go ahead with your question..

Hi this is Trevor on for Brendan. Thanks for taking my questions. A couple quick ones regarding ACA-related buildings being low single digits for the year.

Should most of that be in Q1?.

You know we haven't broken that out specifically, as far as that goes. That's a good question, but we haven't broken that out. Definitely Q1, well it depends on growth throughout the year of our ACA-related monthly item. So it's hard to exactly say that. But as we sit here today, when you take into account that Q1 does have ACA forms filings.

I would think it would be a quarter that would rival out quarters, if not be better than out quarters in regards to ACA revenue..

Okay thanks and then the non-ACA forms filings, was there any unexpected strength in the quarter?.

I would say no. That's been business as usual for us. There were no changes in what we did this year with tax form filings, any other than - now, obviously the more new clients we added on last year, we're going to produce more form W-2s and W-3s, as well as your 1099s.

And so you would have an uptick to the extent that your client base grew, or client growth grew, and employee count, as ours did throughout the year. But it wouldn't be it wouldn't have different characteristics than what it's had in the past..

Okay..

Other than the ACA piece.

Right. Understood. And then lastly for me, did EBITDA guidance suggests second half costs a little bit higher than we were expecting? You mentioned the R&D expenses.

Is there anything else we should think about?.

No. As we look at the out quarters for the adjusted EBITDA guidance, it would primarily be in the R& D, as well as sales and marketing..

The sales and marketing expense, as well..

And then, anything unusual there just based on revenue?.

No. Just as we are ramping offices and they continue to sell at high levels. On those out quarters, as we mentioned on previous calls, those sales reps hit certain gates, so the commission expense goes up throughout the year..

There other accelerators throughout the sales year, which for us starts in February and ends in January..

Understood. Thank you..

Thank you..

Our next question comes from Brad Reback from Stifel. Please go ahead with your question..

Great. Thanks a lot. Just a quick financial statement question. If I look at the cash flow statement, client funds held increased by $429 million in the quarter.

Anything other than timing going on there?.

No. Typically on the client funds held, that first-quarter is a strong quarter, primarily because you have [few that ensued] those bills that first quarter, and people will hit those limits. But as you look at the last year, every quarter tends to increase.

After that first quarter, it will drop off a little after the first quarter and then build back up. And this was our strongest quarter we had over $1 billion in [Franklin sales]..

Which would reflect the onboarded clients that we have done throughout the year last year..

Got it. Thanks very much..

All right. Thank you..

Our next question comes from Corey Greendale from First Analysis. Please go ahead with your question..

Good afternoon. Congratulations on the strong quarter. I wanted to ask about the Q1 guidance. As a public company you have a strong track record of doing at least a little better than your guidance. I think this is a new standard.

So can you address a little more specifically what went better than you expected on revenue in Q1?.

Well, I mean, we had definitely strong onboarding for new business, as you look at it.

Some of it even onboarded in December which we discussed which means you are getting billing for all those at the beginning of the quarter throughout the quarter, instead of those that may have come in through the middle of the quarter, and you get less of the billing for that specific quarter. So that had an impact.

Obviously there was some impact for ACA forms filing, and really it's the project that combined gave us a strong first quarter..

Okay and then on the EBITDA line, I think you beat the high end of that by $10 million, which is more than you beat the high end of the revenue guidance by.

So what was on the cost side that you outperformed by $4 million, or something like that?.

We continue to look for and gain efficiencies in every line item. So that's a strategy of ours and that continued into the first quarter..

Okay and then last one for me, I just want to clarify, your comments on the R&D, you are talking about the R&D expense on the income statement?.

That is correct and there's about a third, around 30%, that we capitalized. But that is correct on those..

We should assume the 30% ratio will hold going forward?.

It depends on the projects we are working on. We capitalized certain projects. But it's been historically between 30% and 33%..

Okay. Great. Thank you..

Thank you..

Our next question comes from Mark Marcon from Robert W. Baird. Please go ahead with your question..

Thank you. Let me add my congratulations.

With regards to the ACA can you just talk a little bit about how satisfied you were with the actual execution of the program with the forms? And what are you seeing in terms of client retention with regards to some of your longer standing clients?.

So we've given our client retention metric each year. Last year once again it was 91%, which it has been the same every year for the last three or four years. So we think that remains good. Obviously we always want to increase retention and those are strategies that we definitely work on. As far as ACA, I couldn't be happier with the group.

It's not just writing code and deploying it you also have to understand what it's going to do, and be willing to make the changes throughout the year as things change. And this is the very first year, not only how was calculated and everything else, but it is the first year it's ever been filed.

And there were a lot of changes happening throughout the year. So I'm very happy with what we have been able to put out there and we will still continue to update items within the ACA module as clients look to become more strategic and how they comply with ACA..

Great so it sounds like client satisfaction with how everything went for the ACA thus far has been pretty good?.

Yes our client satisfaction - I can't speak for every client. There our clients out there. But from my perspective I'm very proud of the group that we had. I'm unfamiliar with issues related specifically to ACA, and I am happy with the way we performed this year..

Great I wasn't suggesting that there were any issues by asking the question. There have been some other players in the space that have had some issues, and so was just checking.

With regards to the sales pipeline is that pretty uniform across - when you take a look at your offices that have been open for 2 or more years are you seeing a uniform level of uptick in terms of the pipeline, or are there any regional differences that are developing?.

To the extent it's regional it's not really about the region, it's about the leader for the office. To the extent that one office is doing better than another office, I would typically point to the leader in that scenario. Usually they have developed reps. They have more executive reps who have been in their territory longer.

And those cities that we've had for a while. And sometimes you will have a city that's mature, but we plucked people out of it. We have plucked executive reps out of it in order to backfill other opportunities. In some cases you can have an office that's mature, that we pulled a manager out to open another city.

So you have some of those factors that come into play. But we have always to date been able to increase the amount that any one office or sales manager can sell, or is responsible for selling through their people. And we have also been able to increase the amount that any one executive rep can sell.

And these numbers are getting large for us, and we are excited about that, and we don't know where that ends as far as a cap. But we are looking forward to continue to grow as we have in the past..

It sounds like you haven't run into a cap on any one office yet is that fair?.

We represent such a small percentage of the overall TAM. We're out there. Time in the territory dictate success in most cases. And we've had a lot of time in a lot of these territories..

And bookings, just on the A&RR comments, bookings are up materially this Q1 relative to Q1 a year ago correct?.

We haven't given a bookings number from that standpoint. Again I would point you to our guidance and how we work through the first quarter and the strength we had in that. I would also point to previous comments I have made about sales teams, how they mature, how they continue to mature more, as well as having more executive sales reps.

And then, what it takes to become an executive sales rep, and how much success you had to have to get to that level. New reps that, and they don't become executive sales reps right away. They have to sell a certain amount. It normally takes 12 to 14 months.

And we're seeing some acceleration in that number, as far as the length of time it takes someone to become an executive sales rep. That is one metric that does seem to be increasing in a good way for us, as far as shortening the length of time to majority for an executive sales rep..

Okay great. Thanks and congratulations..

Thank you..

Our next question comes from John Byne from UBS. Please go ahead with your question..

Hello. Thank you. Actually, my first question was related to your last one.

But in terms of the sales offices, the product to ramp of 24 months, are you seeing any shortening of the ramp period, as you incorporate best practices?.

As far as new office openings, we aren't seeing any material shortening of that to maturity, because they have to ramp up. They are not going to go in and hire 7 to 9 sales reps right away. You are going to start off with a couple, and you will have a couple more, and a couple more.

And, again, you are building a pipeline and a reputation within a new market, typically, for us. Whether it's a new territory in an existing city or not, you are building that. So over time you build that. And so, I can't say we have seen cities where office openings mature at a rate faster than what they have done in the past, which is 24 months..

Okay, that's very helpful and then looking at your Q1 numbers and the Q2 guidance, if you look at the difference, would most of the different sequentially be related to the forms business from ACA W-2s, and so on, or would there be any other reason for the seasonal difference?.

The seasonal difference is the ACA forms filing, to the extent it is seasonal. Not all of the uptick we had in the first quarter I would call seasonal. We had client adds as well that impact that, especially as they come in at the beginning of a quarter. So I would say those contributed also.

From a seasonality perspective, we're going to have the same type of seasonality on an ongoing basis every first quarter..

Okay great.

And just for housekeeping, is there a new tax rate guidance that you have for the year? What should we expect?.

In terms of the tax rate we had the first quarter, we would expect the full year to be a similar rate in that 35% rate. We factored in the R&D and the 199 deduction, based on an annual basis. So unless something changes, and it can fluctuate from quarter to quarter, but that should be in the range..

Okay thanks very much..

Our next question comes from Ryan McDonald from Wunderlich Securities. Please go ahead with your question..

Thanks. Congratulations on the quarter once again. Just wanted to start, again, on the sales ramp strategy.

Can you talk about cities where you have now added a second sales team in those cities? Are you seeing any change or different dynamics to that second sales team ramping? Is it something that is maybe taking a bit longer, since you are already established with it certain client base within there, or has it been a fairly smooth transition with the first sales team?.

No. You are really not. I would go back again to the manager. The territories are substantially the same, as in more than we can call on because of the number - the percentage of the overall TAM that we represent. And also the cadence at which we bring reps on in a new office opening has remained the same. So we need to secure success.

We need to make sure that city is not only mature, but solid after maturity. And there's a very specific way we go about growing that. That's been maintained regardless of geography that we have opened up..

Okay. And then just shifting to some of the deals you mentioned, a few large deals in the quarter. Can you talk about what kind of shift you are seeing in terms of - or what kind of growth you are seeing as you are closing deals North of the 2000 employee range? I know you mentioned that the target market there is 50 to 2000.

But obviously it sounds like there's a few large deals you called out in the quarter.

Is that still high single digits, low double digits, or are you even seeing more than that on a quarterly basis in terms of deal sizes?.

It depends on the quarter. I think typically again we have been selling at the upper end of our range now for a while, as far as reps have had success and clients have had success with the product. So we've sold at the upper end of our range for a while. I wouldn't necessarily say we have gone dramatically over our range.

We do have some outliers and I have given you some information on some of those on the call. But we're still staying very consistent with what our target market is..

Okay and then just one final question for me. You talked about the introduction of the overtime expansion tool and that being a key differentiator for Paycom.

Can you talk about what type of early success you are seeing with that tool? And from a compliance burden standpoint, do you see it is having a similar, if not greater, impact to Paycom's business as ACA has over the past year?.

I can answer that question from what I see here right now. It's a no. ACA has very specific filing requirements. The overtime laws are more of a labor piece to it. But they will have fines. And so, it will be important for people to do it correctly. But I'm unaware of a forms filing piece to it.

So from that standpoint I would say it's a little bit different. Here is how I think we differentiate ourselves, and it's the same way with ACA. You get ahead of it by educating clients on what it is, whether or not they even want to comply, or how they are going to comply in the case sometimes with ACA, to pay or play.

And then from this perspective it's basically a new change where employees that make less than $50,440 and my understanding it's going to go lower to $47,000, but we don't have all the detail on that yet. But you're going to have to pay overtime for salaried employees that make less than that amount, and that's going to impact client’s labor.

In some cases they may choose to make someone salary a little bit larger to match that, and another cases they might choose to pay the overtime.

Either way it will require that you have both payroll history, as well as time and attendance data, so that someone can go through and work those analytics to make the decision of how it's going to impact their business from a labor piece. And foremost companies labor is their largest expense.

So being able to manage that early and make those decisions early versus a quarter later, once it's actually already impacted your labor, is something we want to get ahead of. Nothing has been rolled out specifically at exactly what the numbers is going to be, but we do think it's going to be changed. This isn't a new threshold or a new law.

The current threshold is $23,660. It's just a massive change in the threshold, which is going to impact many companies out there. Especially in the mid market..

Excellent thanks for the clarity congratulations again..

All right. Thank you..

And ladies and gentlemen with that we will conclude today's question and answer session. I'd like to turn the conference call back over to management for any closing remarks..

I would like to thank everybody for joining us on the call. We appreciate your time and interest in Paycom. We will be presenting at the Jefferies Technology Conference in Miami on May 11, and also on the JPMorgan TNT conference in Boston on May 24.

We hope to potentially see all you either there or on the road in the coming months, and thanks to everybody or being on the call. Have a good evening..

Ladies and gentlemen that does conclude today's conference call. We do thank you for attending. You may now disconnect your telephone lines..