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Paycom Software (NYSE:PAYC)
Q1 2021 Earnings Call
May 04, 2021, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

Hello. My name is Philip, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Paycom Software first-quarter 2021 quarterly results conference call. [Operator instructions] Thank you.

I'd now like to turn the call over to your host, Mr. James Samford. Please go ahead.

James Samford -- Head of Investor Relations

Thank you, and welcome to Paycom's first-quarter 2021 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 statements made speak 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 financial measures, including adjusted EBITDA, non-GAAP net income, adjusted gross profit, adjusted gross margin and certain adjusted expenses. We use these non-GAAP financial measures to review and assess our performance and for planning purposes. A reconciliation schedule showing GAAP versus non-GAAP results is included in the press release that we issued at the close of the market today and is available on our website at investors.paycom.com. I will now turn the call over to Chad Richison, Paycom's president and chief executive officer.

Chad?

Chad Richison -- President and Chief Executive Officer

Thanks, James, and thank you to everyone joining our call today. I will spend a few minutes on the highlights of our first-quarter 2021 results, then I'll review the progress we are making on our goals for 2021. Following that, Craig will review our financials and our guidance, and then we will take questions. But first, I want to thank my colleague and good friend, Jeff York, for his many years of service leading our sales organization over the last 14 years.

Jeff has built a sustainable sales organization with a deep bench of like-minded professionals. I look forward to continuing to work with him in his strategic leadership role. One of those like-minded individuals is our new chief sales officer, Holly Faurot. Holly is a true success story at Paycom.

Her 14-year career with us began with an internship in the sales organization. Holly quickly progressed into a top sales rep, a top sales manager and a top regional sales manager earning many of the company's highest sales ranking awards along the way. In 2016, she was asked to further expand Paycom's client relations department, which presents additional products to clients and focuses on creating value by increasing employee usage. Holly has been instrumental in contributing to the success of Paycom across the entire sales organization, and I'm confident she will continue to build on the momentum we are seeing.

We delivered strong first quarter results, even with a tough pre-COVID year-over-year comparison. Our 2021 first quarter revenue of $272.2 million grew 12.3% compared to the prior year period, and came in above the top end of our guidance range despite several previously identified headwinds. Unsurprisingly, the first quarter revenue was impacted by lower forms, filings and adjustments due to lower hiring trends in industries most impacted by the pandemic in 2020. Excluding forms, filings and adjustments revenue, our year-over-year recurring revenue growth accelerated again in Q1.

As we go through 2021, we will have a cleaner comparison that will provide a truer reflection of our revenue growth profile since the arrival of the pandemic. Turning to profitability. Our first quarter adjusted EBITDA was $133 million, representing adjusted EBITDA margin of 48.9%. As reflected in our updated guidance, which Craig will discuss, we believe the combination of revenue growth and adjusted EBITDA margin makes us well-positioned to exceed the Rule of 60 in 2021.

Our marketing plan continues to work very well, delivering strong demo leads in the first quarter. We continue to see success from our advertising spend, and we intend to continue to spend aggressively to fuel future revenue growth and expand a roughly 5% market share in a large and expanding HCM TAM. We are capitalizing on the shortcomings of disparate HCM systems with the value proposition, the Paycom single database solution that is stronger than ever. Employees expect their HR software to be efficient and easy to use.

In fact, in a recent survey we commissioned with a third party, employees expressed frustration with complex and disparate HR software that lack the transparency and usability they've come to expect from consumer-oriented technologies. Paycom's employee usage strategy and single database solutions squarely addresses these expectations. We had record high employee usage rates in Q1, as measured by our Direct Data Exchange or DDX. This is fueling new opportunities for product innovation and automation for products like BETI, our better employee transaction interface for payroll, which we started rolling out to a select few clients during the quarter.

BETI is already receiving high marks as it transforms the way payroll is done. I believe over the next 12 to 18 months, BETI will become the standard for how payroll should be done. Now that the first quarter is over, we have substantially lapped the pandemic's impact on our comparable year-over-year numbers. New client additions are driving our growth in Q2 and beyond.

The negative revenue impact the pandemic had on our pre-pandemic client revenue remained stable. While we haven't seen any material improvement in employment trends at those same clients, our forecast and future growth initiatives are not dependent on any improvement. Our strategy throughout the pandemic has remained unchanged. We will continue to focus on the three controllable activities of providing world-class service to our clients, rapidly developing new technologies and increasing the number of new clients added to our platform.

We've done a great job and succeeded in these areas, which has kept us on track to achieve our growth initiatives. I'd like to thank our employees for their patience, flexibility and grit over these last 14 months. In summary, now that we've lapped Q1's tough year-over-year comparison with the last pre-COVID quarter, we expect that the strength of our growth profile will be reflected in our future results. The record new business revenue and record number of new clients added in 2020, combined with robust first quarter sales, is bolstering our long-term revenue growth opportunity.

As a reminder, we only have approximately 5% market share of a growing TAM, so we have a long runway ahead of us. Our strategy is working, and our products have never been more relevant. With that, I'll turn the call over to Craig for a review of our financials and guidance. Craig?

Craig Boelte -- Chief Financial Officer

Before I review our first-quarter 2021 results and our outlook for the second quarter and full year 2021, I would like to remind everyone that my comments related to certain financial measures will be on a non-GAAP basis. As Chad mentioned, we are pleased with our first-quarter results with total revenues of $272.2 million representing growth of roughly 12% over the comparable prior year period, which was primarily driven by new business wins, including very strong new client revenue starts in the first quarter. Within total revenues, recurring revenue was $267.8 million for the first quarter of 2021, representing 98% of total revenues for the quarter and growing 12% from the comparable prior year period. As expected, the effects of lower headcount on our pre-pandemic clients and the impact of 150 basis point interest rate cut that occurred in March 2020 remained relatively unchanged.

In addition, as we discussed on our Q4 2020 earnings call, your employees working in industries hardest hit by the pandemic and lower overall turnover in those industries resulted in fewer annual forms, filings and adjustments. It is difficult for us to estimate the exact amount that those trends impacted us, but we don't believe it was dramatically different from our expectations. Total adjusted gross profit for the first quarter was $236.9 million, representing adjusted gross margin of 87%. For 2021, our target adjusted gross margin range is expected to remain strong at approximately 85% to 86%.

Adjusted total administrative expenses were $118.8 million for the first quarter as compared to $108.4 million in the first quarter of 2020. Adjusted sales and marketing expense for the first quarter of 2021 was $59.3 million or 21.8% of revenues. We continue to be very pleased with our marketing strategy with another quarter of very strong demo leads, and we plan to continue to invest in marketing throughout the remainder of 2021. Adjusted R&D expense was $23.1 million in the first quarter of 2021 or 8.5% of total revenue.

Adjusted total R&D costs, including the capitalized portion, were $34 million in the first quarter of 2021 compared to $27.6 million in the prior year period. We have been aggressively recruiting talent in R&D to drive our future growth through innovation and new product development. Adjusted EBITDA was $133 million in the first quarter of 2021 or 48.9% of total revenues compared to $117.9 million in the first quarter of 2020 or 48.7% of total revenues. We benefited from cost efficiencies in G&A, which we expect to continue throughout the year.

We plan to continue to invest in the marketing and R&D. Our GAAP net income for the first quarter was $64.6 million or $1.11 per diluted share versus $63 million or $1.08 per diluted share in the prior year period based on approximately 58 million shares in both periods. Non-GAAP net income for the first quarter of 2021 was $85.9 million or $1.47 per diluted share versus $77.9 million or $1.33 per diluted share based on approximately 58 million shares in both periods. We expect noncash stock-based compensation for the second quarter of 2021 to be approximately $27 million to $28 million.

For the full year, we anticipate noncash stock-based compensation will be approximately $105 million to $110 million. Turning to the balance sheet. We ended the first quarter of 2021 with cash and cash equivalents of $215.1 million and total debt of $30.5 million related to construction at our corporate headquarters. Cash from operations was $89.5 million for the first quarter, reflecting our strong revenue performance and the profitability of our business model.

The average daily balance of funds held on behalf of clients was approximately $1.7 billion in the first quarter of 2021. Shifting to guidance. We have now substantially lapped the last pre-COVID year-over-year comparison, and our guidance for strong second quarter revenue growth represents a true reflection of the strong performance we achieved throughout 2020. We are pleased to be able to provide the following Q2 and full year guidance.

For the second quarter of 2021, we expect total revenues in the range of $231 million to $233 million, representing a growth rate over the comparable prior year period of approximately 28% at the midpoint of the range. We expect adjusted EBITDA for the second quarter in the range of $80 million to $82 million, representing an adjusted EBITDA margin of approximately 35% at the midpoint of the range. For fiscal 2021, we are raising our expected revenue range to $1.017 billion to $1.019 billion, up from $1.009 billion to $1.011 billion, or approximately 21% year-over-year growth at the midpoint of the range. We expect adjusted EBITDA in the range of $400 million to $402 million, representing an adjusted EBITDA margin of approximately 39.4% at the midpoint of the range.

To conclude, our strategy to mitigate the impact of the pandemic and grow the business has been working. And we will continue to focus on 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 profitable recurring business model and a long runway to deliver sustainable long-term revenue growth. With that, we will open the line for questions.

Operator?

Questions & Answers:


Operator

[Operator instructions] Your first question is from the line of Raimo Lenschow with Barclays.

Raimo Lenschow -- Barclays -- Analyst

It's very close. Thank you. Congrats on a great quarter, and I'm sure you're looking forward to Q2. Chad, can you maybe remind us, because that's the question I get a lot from investors.

How can the 12% growth in Q1 jump to like 28% growth in Q2? Like, obviously, the comps are getting into like, maybe talk about the puts and takes that are driving it because that makes it really exciting. And then one for Craig. You mentioned that the cost efficiency efficiencies in D&A. Can you just kind of elaborate a little bit on that one? Thank you.

Chad Richison -- President and Chief Executive Officer

Yes. Thanks, Raimo. So I guess, first, I would say, as you know, Q1 is typically one of our largest quarters for revenue in any given calendar year. And that's because of our annualized revenue billings of forms, filings and adjustments that come in throughout the year, which have to do with hiring and turnover trends throughout the year at different businesses.

Well, 2020 reacted differently than any other year since I've been doing this since 1998, in which the hiring trends were different. It would be traditionally a restaurant that may have 100 employees could easily do 300 W-2s with forms, filings and what have you. This year, that same-restaurant may do 120 W-2. So we saw significant differences in hiring trends throughout 2020 than what we had seen in the past.

We did try to estimate what those would be. Also, as a reminder, this Q1, we are still lapping Q1 of a previous year that did not have COVID in it, which made for tougher comps. And as we move through second quarter, we've substantially lapped the pandemic. Now you did still have recurring revenue still getting worse throughout the month of April, as we had mentioned it kind of got to its worst point beginning in May and then started to stabilize.

But we are excited about our next quarter guide. The guide that we're putting forth in Q2 of this year is the largest Q2 guide we've had since 2017 on a percentage basis for revenue growth. So you weren't necessarily wrong in your early take that we're getting back on the right track or [Foreign language], Raimo, as you might say in your native language.

Raimo Lenschow -- Barclays -- Analyst

That's very good.

Chad Richison -- President and Chief Executive Officer

My minor's paying off. My German minor is paying off. Craig will answer your second one. His last name is Boelte.

Craig Boelte -- Chief Financial Officer

In terms of the G&A line and the cost efficiencies we're seeing, as we're looking to hire additional people, those are primarily going to be in other areas of our income statement. So we're continuing to hire aggressively in the R&D area and in the sales and marketing, as well as in the operations area. So we're just not going to see the same level of hiring on the G&A line as what we would see in other areas of the business.

Raimo Lenschow -- Barclays -- Analyst

OK. Thank you.

Operator

Thank you. Your next question is from the line of Samad Samana with Jefferies.

Samad Samana -- Jefferies -- Analyst

Good afternoon and thanks for taking my questions, Chad. Maybe the first one for you. On the bookings side, as you mentioned, we're starting to kind of lap last year, and you guys had a great 2020. Would you say was 1Q 2020 from a bookings perspective, was it a record compared to other quarters? Maybe just help us further triangulate on the in-quarter new bookings performance? And then just a follow-up question as well.

Chad Richison -- President and Chief Executive Officer

Yes. So I mean since obviously, our bookings have been very strong. I mean last year, we did have record bookings, as well as that record new business revenue as well as a record number of clients to our platform, which was an increase from prior years. As we've returned to guidance, we've gotten away from talking about bookings.

Obviously, our bookings are very strong as what's reflected in our second quarter guide.

Samad Samana -- Jefferies -- Analyst

Understood. And then maybe on BETI, you mentioned a couple of customers have already been rolled out for them. Could you maybe help us understand how pricing for that's working? And maybe how pervasive the use of that looks like at those customers?

Chad Richison -- President and Chief Executive Officer

Yes. I mean BETI is really an all or nothing type usage product. I mean you do have to change your internal process in order to use BETI because like we've said in the past, payrolls are traditionally started after pay period end. And BETI contemplates all that happening at payroll beginning to where once pay period ends, the payroll is done.

And so we have had clients already submit using BETI and their employees are actually able to use BETI. As a matter of fact, one, within the first hour of release, we had like 65% employee approvals and by time of submission, they were over 85%. So employees are already engaging in it. We're getting feedback from employees that this is the first time I've really looked at my check and less understood it.

So we're having a lot of positive there. We expect to put on at least 100 more clients in the next couple of months on BETI and then throughout the year, we'll continue to convert all over. And what I mean by convert, it's not a conversion of debt. It's more a conversion of their internal process and how you approach each payroll a little bit differently.

In our own environment, we've gone from over 55 clicks or processes within a payroll down to three. Each person's experience is going to be differently depending on whether you're doing commissions, bonuses, labor distribution, job costing. So it is a little bit different for each company, but it does drive a lot of efficiencies. And as those payroll administrators submit payroll, they have a very high degree of confidence in the accuracies that have already been approved by those employees.

So it's going very well now. As far as billing, BETI is not going to be billed unlike many of our other modules. It will be a per like per employee fee to use BETI. And then as we move throughout this year, we'll continue to sell more and more clients on its value.

Samad Samana -- Jefferies -- Analyst

Great. And I apologize in advance for squeezing a third one in, but I'll break the rules here. Any other changes we should expect with Holly's appointment in her new role? Any other changes to either the go-to-market motion or the sales organization that we should anticipate in conjunction with that?

Chad Richison -- President and Chief Executive Officer

Well, I mean we changed the sales organization every year. We changed about three or four years ago to really focus on employee usage as an organization. We focused on selling usage. We'd come out with the DDX, then we came out with Manager On-The-Go, now BETI.

So obviously, as we settle into this year, there are some changes that we make to our selling motion, but that's not unlike what we've done in any given year. Holly was our first intern on the sales side. And actually, she started interning for us when I was the sales manager. So Holly has a deep knowledge of what we've been doing this entire time.

She's helped us build it up to now. And the reason why Holly was chosen is it allows us to continue to increase the drive that we have throughout our sales organization with a consistent leader with also a consistent talk track that we've been driving throughout the sales organization for the last 20 years. So I wouldn't see any significant changes happening to the sales other than what we always have, which is improvements on our strategies as we deliver more value to the client.

Samad Samana -- Jefferies -- Analyst

Perfect. Thanks again for taking my questions.

Operator

Thank you. Your next question is from the line of Brad Reback with Stifel.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. Chad, the upside in the quarter wasn't as robust as we've come to expect with you guys. Was there any sort of one or two items in the quarter that maybe weren't as strong? W-2s maybe a bit below original expectations or anything along those lines?

Chad Richison -- President and Chief Executive Officer

Yes. It's related to year-end services. I mean we have pretty good visibility quarter to quarter based on our recurring revenue. And then what we believe we will be adding from a new client revenue perspective.

When you're looking at year end, which, as you guys have seen in the past, are typically our largest quarters because of those year-end service fees. It gets harder to put an exact number on how those negative trends impacted us. We did a pretty good job of estimating that. And we don't necessarily guide to have a certain level of beat.

We guide to what we can see and oftentimes with new business revenue, that can be impacted one way or the other. And as it relates to first quarter, though, we've always been heavy on annual forms, filings, adjustments. And also to note that it's not just our W-2 forms with us. We also have ACA forms at the end of every year as well.

So I think we did a pretty good job estimating its impact. Obviously, the fact that we continue to grow throughout the quarter, and we're coming out strong into Q2, reflects that we did have strong adds throughout Q1 and coming out of Q4. But those numbers were impacted by our annual forms filing business.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much.

Operator

Thank you. Your next question is from the line of Mark Marcon with Baird.

Mark Marcon -- Robert W. Baird -- Analyst

Good afternoon and thanks for taking my questions. I'm wondering, the commentary with regards to what you're seeing in terms of the number of employees within the client base. You mentioned it wasn't much of a help in terms of the first quarter, but as you look through the quarter and going into March and then April and now going into May, are you starting to see a rebuild? And how should we think about the sensitivity in terms of if there's a 1% increase in terms of the number of employees, how does that translate to revenue, broadly speaking?

Chad Richison -- President and Chief Executive Officer

Yes. I mean well, we'd like to think 1% equals 1%, but that 1% has to happen across our client base that we serve, which is less than 5% of the total addressable market. So in answer to your question, as far as those clients that were mostly impacted by the pandemic that we said really hit its worst for us in May and then started to stabilize for us, we haven't seen any meaningful changes in those same clients. So as we move forward, I don't know that, that number becomes an important bellwether for us as far as that $1.85 million to $2 million impact that we see from the recurring revenue negative impact from those clients.

So I don't know that it's a part of our story moving forward. Obviously, we would hope that those clients are able to hire back and that they are able to come out of it in the same situation that they entered into it. But we'll have to see again. We're not seeing any meaningful improvement in those numbers.

Mark Marcon -- Robert W. Baird -- Analyst

OK. Is that because of certain industries, Chad? Or I mean when you take a look at the overall employment numbers, broadly speaking, it does seem like sequentially, on a seasonally adjusted basis, things are improving broadly speaking, and we'll get the April report here in a few days. Is it just certain industries? Or what would be the reason why we wouldn't start seeing some of the national trends come down to the Paycom client base?

Chad Richison -- President and Chief Executive Officer

Well, I mean our comments weren't really a wholesale about the United States as much as it is about these particular clients that work with us and were working with us prior to the pandemic that they had layoffs and different hiring trends throughout the year. A lot of them may have been kept afloat with the PPP that's been out there and what have you. But we haven't seen any significant movement with that group. Like I said, I do believe that people took their hits early as it related to many of our clients.

They may not be as quick to add people back. Potentially, some may have become a little bit more efficient. There may be some out there that are struggling. But again, we've been focused on adding new business to our pipeline, and focused on those.

So all that's to say, it's been stable with that group, and I don't know if or when the trends would impact that group because I believe it's going to be more of a client-by-client impact.

Operator

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

Daniel Jester -- Citi -- Analyst

Great. Thanks for taking my question. Kind of along the same line, Chad. I mean I think many would project that we're going to see some historic levels of hiring here in the U.S.

in the next couple of quarters. So you've been through macro up cycles in the past. So maybe you can just remind us, how does sort of the HR, either the buying cycle or sort of the spending intention, how does that evolve as we get into a really brisk hiring environment? Do you see HR officer trying to get ahead of that? Or is there a bit of paralysis because they're focused on growth in the business and maybe don't want to make a change on their payroll module when the outlook looks so great?

Chad Richison -- President and Chief Executive Officer

Yes. I mean I think we're in a business where we make those departments more efficient. And so to the fact that you need to go hire many people using our onboarding product, using our applicant tracking or talent acquisition product, using our background checks products that we have out there. I mean I think that we can aid people in that.

So I also think you're really seeing a shift toward the employee user. I don't know that four years ago, you could even point to many employee users, especially in the mid-market. And today, that's really becoming the standard. And so I think there are a lot of business that are focused on leveraging employee usage trends of what they use in their daily lives working with consumer products.

I think there's a lot of businesses looking to leverage that to create value for themselves. So as businesses come back, and I'm not saying that we're not seeing positive hiring trends. My comments are related to those clients that represented the $1.85 million to $2 million weekly impact. We're not seeing those numbers move dramatically.

Are we seeing impacts of businesses starting to come back and hotels starting to hire more and what have you? We're seeing some of that and where we can see that is in our talent acquisition as more requisitions are open, is in our background checks. So I do think things are getting better, but the question was more related to, how are those clients that were impacted, those clients that we said had that monthly weekly negative revenue impact of $1.90 million to $2 million. I think about a quarter or so ago, we called out, it may have improved $100,000 a week-ish. It kind of fluctuated week to week.

And then now we haven't seen any substantial sustainable change from that, which would be accurate as we sit here today. But we are bullish about employee trends beginning to get better for us. It's never something that we've been able to focus on, lay our hat on that or bet the farm on that, you've got to really do the work. And what we are doing, we are going out, and we are selling businesses right now.

And if they have 415 employees, then we're selling them at that, and we're bringing them on. Now maybe they grow, maybe they don't. But we've just been focused on adding new business onto our platform, and that's worked well for us.

Daniel Jester -- Citi -- Analyst

Great. Thank you. And then just on BETI quickly. Now that you've announced that and you're starting to get customers on it, are you seeing some of your other customers kind of get more with some of the modules that they need to be able to use BETI? So are you seeing more engagement on Manager on-the-Go? Are you seeing more engagement on DDX as customers get ready to use BETI in the future?

Chad Richison -- President and Chief Executive Officer

Yes. Both Manager on-the-Go and DDX are at the highest level of usage, no matter how you measure it. And I'm talking about at the highest level of usage right now. And so that's been getting better and better as we've gone throughout the, I would say, I think we've had the DDX for the last 18, 19 months.

We had Manager on-the-Go now for well over a year. And so we continue to see those trends tick up. Now is that in anticipation for BETI? Or is that because of the value someone's receiving by using those things independently, whether you're setting up for BETI or not? I would say it's probably the latter, but the fact that it's happening will set us up very well for BETI. And I do believe that as people look and see the value that BETI is going to deliver for both the business as well as the employees, I think you're going to even have more usage around the DDX and Manager on-the-Go, from a best practice perspective.

Operator

Your next question is from the line of Brian Schwartz with Oppenheimer.

Brian Schwartz -- Oppenheimer & Company -- Analyst

Yes. Hi. Thanks for taking my questions this afternoon. Chad, one question for you and then a follow-up for Craig.

For you, on the new business that was coming in the quarter, can you share any color in regards to the linearity on how that business came in? It seemed like there was a possibly a different operating environment when we started in January versus kind of the end of the quarter. And then I have a follow-up for Craig.

Chad Richison -- President and Chief Executive Officer

Yes. No, I wouldn't say there's been any meaningful difference in how we brought in our revenue in first quarter this year than how we brought in revenue in first quarter of subsequent years. You're going to typically have your greatest number of starts in the first part of that as people look to start fresh at the beginning of a year. Of course, in first quarter, your quarter-to-date and year-to-dates are the same.

So any time in the first quarter is not a bad time to convert and what have you. But no, I wouldn't say that we've seen trends meaningfully different than what we'd seen in the past as far as when someone chooses to start in the quarter.

Brian Schwartz -- Oppenheimer & Company -- Analyst

And then, Craig, one follow-up I just have on the guidance, maybe underlying the annual guidance. I remember last quarter, when you reinstated the annual guidance, you set a target out there for a rule of 60. And at that time, that guidance had assumed no macro recovery. And you are raising your guidance here today, still targeting that rule of 60 for this year.

But I'm just wondering if there's any change in terms of your view on the timing behind a macro recovery or if it still assumes no big macro recovery this year? Thanks.

Craig Boelte -- Chief Financial Officer

Yes. I mean our annual guidance still assumes no macro recovery at this time. So consistent with how we guided last year as well.

Operator

Your next question is from the line of Robert Simmons with RBC.

Robert Simmons -- RBC Capital Markets -- Analyst

Hi. Thanks for taking the question. Can you talk to what you're seeing in terms of return to office and return to in person selling and also then what the expense and margin implications of that are or could be?

Chad Richison -- President and Chief Executive Officer

Yes. So is that question as it relates to us or clients from a return to office?

Robert Simmons -- RBC Capital Markets -- Analyst

Mostly for you, but whatever you're seeing.

Chad Richison -- President and Chief Executive Officer

Yes. Well, first, I'd say it's very regional and return-to-office strategy is depending on where you're located. For us internally, we've continued to be work from home for most everybody. We have put out a return-to-office plan for our employees, beginning with the supervisors and certain leaders coming in June.

We will then have team leaders start to come back in, in July. And then we will start alternating in our general population throughout the month of August in hopes of being back to the office full-time in September. Now, when you're talking about ourselves opportunities as far as going to meet with clients, we're going to continue to meet clients where they live. You may have some clients that are wanting us to come in.

You may have some parts of our sales process in our steps of certain sales that continue to stay in more of a hybrid model, and then I would see us going in person for others. But I wouldn't say that we're back at that level or anywhere close yet. In fact, we don't have any salesperson that's gone out and called on a business in person yet. So we're kind of waiting to see how that develops.

I would say we're hopeful. But I think that's something that's going to just kind of happen throughout these next couple of quarters, and we'll just kind of see what happens.

Craig Boelte -- Chief Financial Officer

Yes, on the expense related to kind of return to office. We wouldn't see that as significant increase in cost. We're already maintaining the buildings and all of those things. So even on the travel side, we wouldn't see a significant uptick.

And any of that's been already baked into our guidance.

Robert Simmons -- RBC Capital Markets -- Analyst

Great. Thank you very much.

Operator

Your next question is from the line of Ryan MacDonald with Needham and Company.

Josh Reilly

Hey guys. This is Josh on for Ryan. Just one question from me. If you look at platform usage pre-COVID versus today, do you think clients are deepening their understanding of productivity? And how software can affect their workflows that previously maybe they didn't understand in the same way versus managing their operations? And then do you think this results in a permanent shift of customers buying more modules upfront as we exit the pandemic? Or could there be some reversion to pre-pandemic trends?

Chad Richison -- President and Chief Executive Officer

I mean it would be hard to think that we're going to go backwards in technology. It doesn't usually happen that way once you've made that jump. So I wouldn't think that we're going backwards. As far as your question about, I do believe that the farther an employee is away, maybe the more metrics you may have to look at.

The harder an employee is to touch, the more metrics you're left with that you really need to manage. And so I do think being able to engage with employees through technology makes it both easier for the employee as well as for the business to kind of really share in the same transparency there. So I don't see us going backwards in regards to that. It's something that was happening anyway.

I mean it wasn't that the pandemic created these opportunities. I think the pandemic more sealed the fate of the old way. In fact, we were already seeing trends with employees that are used to using consumer-based technology to do banking, get a plane ticket, order a coffee and then they came to work, and it was 1992 through email and what have you. And so we were already seeing the trends of that usage happening.

I think the pandemic just provided a stronger proof source for. The reason for that, it probably accelerated that for some people. But I don't see us going backwards in that because it was right before the pandemic, and the pandemic just produced another proof source for reasons why it's important for employees to have a direct relationship with the database.

Operator

Your next question is from the line of Siti Panigrahi with Mizuho.

Unknown speaker -- Mizuho Securities -- Analyst

Hey guys. It's actually Matt Diamond on Siti's behalf. Congrats on the strong print. I've heard the questions about guidance but I want to phrase mine a little bit differently.

It looks like the magnitude of the 2Q guide and the magnitude of the annual year, the full year guide, implies some strength in the back half of the year. I know you can only comment on what you see for sure right now, but I'd love to get your insight on how to disentangle the magnitude of the 2Q guide and that of the annual guide. Anything you're seeing in the second half of the year specifically would be helpful.

Chad Richison -- President and Chief Executive Officer

Yes. So we've always guided to what we can see. We have not changed that approach. As we'd said, the Q2 is our highest guide that we've had since 2017.

As we sit here today, I really don't know deals that are starting in October. But I know as we move throughout this quarter and especially as we move throughout future into the future quarters that we'll see more and more revenue that we're onboarding.

Craig Boelte -- Chief Financial Officer

No, that's what I would say as well. As we set up our guide, we guide to what we can see. And for the back half, we'll continue to take a look and update as appropriate.

Unknown speaker -- Mizuho Securities -- Analyst

And on the sales office side, I know there's been some commentary around a return to the office. I'm curious about your plans for sales office openings this calendar year. Is there any light that could be shed there?

Chad Richison -- President and Chief Executive Officer

It's still part of our strategy, opening sales offices, and we're going to continue to do that as it makes sense. As we talked about during the pandemic, every office was substantially open because our people could really sell a prospect anywhere. Prior to the pandemic, it was all in person. So if we wanted to sell a deal in Las Vegas, we don't have an office in Las Vegas.

We had to fly someone there and go there in person. During the pandemic, we were able to do that virtually. And so as we shift back, there will be offices that we'll be looking to open. And then we'll have to do it in the right time as well because I'm not 100% sure when we will be going to full in-office selling again if ever from that perspective as it relates to the mid-market.

And I'm talking about where every appointment is in person. I mean before if we had five appointments with the prospect, every one of them were in person. I'm not 100% sure that's going to be the case on a go-forward basis. And that's not something we're trying to force.

That's something where we're going to meet the prospects where they live in a way that produces a successful communication for both us and the prospect.

Operator

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

Bryan Bergin -- Cowen and Company -- Analyst

Hi. Thank you. I wanted to ask a question around client switching behavior. So the large incumbent providers have talked about a retention benefit for them that seems to be partly supported by a switch here from the pandemic uncertainty and some of the PPP reporting requirements.

Has your sales team seeing any of that behavior in the pipeline? And if so, do you consider that an incremental opportunity as things normalize?

Chad Richison -- President and Chief Executive Officer

Well, our retention is directly reflected with usage. In fact, someone gave me a retention report the other day, and I thought it was a usage report because the trends are almost the exact same. You watch usage go up, you watch retention go up. And so that's really what we've been seeing as a reflection of strong retention, it's about usage.

Are there things out there that make it to where somebody is less likely to switch? I mean I don't think so. I mean you're going to become more efficient if you switch to us. We have a very strong value proposition. Your employees are going to like it more.

And we're going to create even more value. So I don't really think waiting is a good opportunity to wait on that. And so we've been focused on driving revenue prior to the pandemic. We've been focused driving it during the pandemic.

And once the pandemic ends, I mean it's not my job to say when that happens. But once the pandemic's over, I would expect us to continue to have strong sales regardless of what's out there as far as trends one way or the other with software because of the efficiencies that we're driving and the dramatic difference in experience that a client is going to have using our product today than what they would have four or five years ago.

Bryan Bergin -- Cowen and Company -- Analyst

OK. And then just are you seeing any different behavior in what modules existing clients are attaching as the economy is reopening here? Or seeing any new clients take on more at the point of purchase?

Chad Richison -- President and Chief Executive Officer

Look, background checks are doing better than they've done in the past or than they did last year because you're having more people hired. When I talk about hiring trends and improvement, I'm talking about those businesses that we had pre-pandemic that were hit. I'm not talking about all the new businesses that we've added since or businesses that weren't hit negatively by the pandemic last year. So I want to be able to separate the two of those.

When I'm talking about hiring trends where we're not seeing improvement, I'm talking about those clients that were most impacted by the pandemic last year, and they're in the industries you would think they would be in. But we still do see positive trends happening across the board with more people doing background checks, doing onboarding today more so than they were doing last year, but we're still not back to where we were at pre-pandemic levels.

Operator

Your next question is from the line of Josh Beck with KeyBanc.

Josh Beck -- KeyBanc Capital Markets -- Analyst

Thank you for taking my questions. Chad, you made a pretty specific comment about BETI becoming the standard for payroll in 12 to 18 months. So I'm just curious what you mean by that? Would love to hear a little more on that topic.

Chad Richison -- President and Chief Executive Officer

I think all of our clients will be using BETI within the next 12 to 18 months.

Josh Beck -- KeyBanc Capital Markets -- Analyst

OK. That definitely clarifies it. What about with respect to marketing and advertising? How have you changed maybe the composition, the channels versus, say, pre-pandemic? Is there any notable differences in how you want to invest across those areas?

Chad Richison -- President and Chief Executive Officer

Yes. Well, I would just say we've gotten better at it, as you continue to spend on it. And again, we measure this week after week, week over week, based off the number of leads that we get. And some weeks, leads are generated in areas, maybe a little bit stronger areas one week than what we may see in the next week.

Meaning that you may have more come in digitally one week and the next week could be delivered through what we're doing from a targeted marketing perspective where we already know who you are, we're targeting you. All of that is a part of our marketing strategy. We're not just putting ads on TV and seeing who's calling us. We have many legs to our marketing department and as well as to our marketing strategy.

And so it's continued to evolve. And we've continued to measure it the same way. I mean our successful marketing campaign delivers demo leads for us. Those are companies that request a demo.

We have leads that aren't demo leads of someone that may go in and download white papers or they're interested, but they have not yet requested a demo. From a demo lead perspective, we're still setting appointments with over 90% of those as they come in. So they're very strong leads for us, and we've been having a lot of success there.

Operator

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

Arvind Ramnani -- Piper Sandler -- Analyst

Thanks for taking my questions. Congrats on a good quarter. I just want to go back to this topic of BETI. You certainly provided a lot of color on BETI, and it seems that it's getting really good traction.

And I know it's very different than DDX. But can you kind of help frame how impactful BETI is as it pertains to win rates? I know DDX had like a big impact on win rates. I'm just trying to get an understanding of the business model impact of BETI.

Chad Richison -- President and Chief Executive Officer

Yes. I mean well, BETI is a unique product that comes with a unique strategy, and that is about having employees being able to visualize what their checks are, what the check is going to be, what components impact their check to where they're able to visualize and participate in that throughout the pay period and then at pay period end, they're able to approve that, that check is correct. And what that does is it eliminates manuals, voids, adjustments, all the things that payroll departments and accounting departments traditionally have to do after the fact once they found out that, that check didn't exactly include everything that it should have for that employee. And so by moving the process up to the beginning of the pay period versus at the end of the pay period, it's going to change the way people do that payroll.

As far as the win rate, do I think it's going to impact our win rate? Absolutely, once people really start using it. The DDX we came out with, it started impacting our retention not long after we came out with it. And Manager on-the-Go, I would say, is a similar product as that. And all of that got more and more people engaged, employees, again, engaged in our software and interacting with the database on their own.

And the more people that interact with the database on their own, the more accurate the data is, the more confirmation that you have that the data is accurate, and it produces less liability and exposure for the businesses that deploy it. So I see that continuing with us as we move forward, and I do think it's going to impact both our win rates and our retention positively as it becomes prevalent within our platform.

Operator

Your last question is from the line of Alex Zukin with Wolfe Research.

Unknown speaker -- Mizuho Securities -- Analyst

Hey there. This is Allan on for Alex. I know we only get client counts on a quarterly basis. But can you talk about the momentum you're seeing up market that is driving improvement in revenues per client? And I got one follow-up.

Chad Richison -- President and Chief Executive Officer

Yes. We've continued to have success. We really started rolling out an inside sales group. I would say we had five or so people for several years.

And then about two years ago, we started building out that group. As we've done that, we've obviously seen more deals below our target market. And we continue to see deals above our target market. Even as we rolled through last year, I was even a little bit surprised that our average billings per client wasn't down a little bit when you looked at the growth that we had in client units.

But it was pretty much the same, which just shows the fact that, yes, we are continuing to add small business clients, but they're also being bookended with the large business that we continue to bring on as well.

Operator

And that does conclude the Q&A portion. I would like to turn the call over to Chad Richison for closing remarks.

Chad Richison -- President and Chief Executive Officer

All right. I want to thank everyone for joining us on the call today. I'd like to send a special thanks to all the employees at Paycom for their commitment and patience throughout the pandemic. Over two-thirds of our staff are either fully vaccinated or in the process.

As I've stated in the past, I do believe that getting vaccinated saves lives, maybe your own, but likely a loved one. And as from an investor outreach front, this quarter, we'll be presenting at the Cowen Technology Conference on June 1 and at the Baird Global Consumer Technology & Services Conference on June 10. Paycom will also be hosting one-on-one meetings in May and in June at the Needham, JPMorgan and Stifel conferences. We look forward to speaking with many of you very soon, and I appreciate your continued interest in Paycom.

Thank you, operator. You may disconnect.

Operator

[Operator signoff]

Duration: 55 minutes

Call participants:

James Samford -- Head of Investor Relations

Chad Richison -- President and Chief Executive Officer

Craig Boelte -- Chief Financial Officer

Raimo Lenschow -- Barclays -- Analyst

Samad Samana -- Jefferies -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

Mark Marcon -- Robert W. Baird -- Analyst

Daniel Jester -- Citi -- Analyst

Brian Schwartz -- Oppenheimer & Company -- Analyst

Robert Simmons -- RBC Capital Markets -- Analyst

Josh Reilly

Unknown speaker -- Mizuho Securities -- Analyst

Bryan Bergin -- Cowen and Company -- Analyst

Josh Beck -- KeyBanc Capital Markets -- Analyst

Arvind Ramnani -- Piper Sandler -- Analyst

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