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Paycor HCM (PYCR 1.74%)
Q3 2023 Earnings Call
May 10, 2023, 5:00 p.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by, and welcome to Paycor's third quarter fiscal year 2023 earnings call. [Operator instructions] Please note, this conference is being recorded. I would now like to turn the call over to Rachel White, vice president of investor relations.
Rachel White -- Vice President, Investor Relations
Good afternoon, and welcome to Paycor's earnings call for the third quarter of fiscal year 2023, which ended on March 31. On the call with me today are Raul Villar, Jr., Paycor's chief executive officer; and Adam Ante, Paycor's chief financial officer. Our financial results can be found in our press release issued today, which is available on the investor relations section of our website. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call.
Statements made on this call include forward-looking statements related to our financial results, products, customer demand, operations and other matters. These statements are subject to risks, uncertainties and assumptions and are based on management's current expectations as of today and may not be updated in the future. Therefore, these statements should not be relied upon as representing our views as of any subsequent date. We also will refer to certain non-GAAP financial measures and key business metrics to provide additional information to investors.
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Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures is provided in our press release on our website. With that, I'll turn the call over to Raul.
Raul Villar -- Chief Executive Officer
Thank you, Rachel, and thank you all for joining us to discuss Paycor's fiscal third quarter results. As employee engagement nationwide dropped to the lowest level in nearly a decade, we are seeing robust demand for our modern and differentiated HCM suite that enables leaders to more effectively coach, optimize and retain their people. With these essential talent tools, our customers are improving the core strength of their critical frontline leaders and increasing their employee retention by 10%. Revenue grew 32% this quarter as we continue to make great progress expanding our sales coverage and increasing PEPM.
This also marks the fourth consecutive quarter of margin expansion, delivering over 400 basis points of improvement year over year, while investing in capabilities that further differentiate Paycor in the market. Paycor's strong results are evidence of consistent execution across the enterprise. We continue to expand our go-to-market capabilities, seller headcount growth remains on track for 20%. Win rates remain high, average deal size continues to expand, and we are pleased to report another record third quarter for bookings.
These efforts are underpinned by investments in brand awareness, lead generation and broker relationships that drive sales opportunities. We are thrilled with the acquisition of Verb, a people development platform, incorporating behavioral science and proprietary microlearning content to create best-in-class workplace training. The acquisition will enhance Paycor's mission of empowering leaders by providing them with learning tools to develop their associates with personalized development pathways. Like our other recent acquisitions, we plan to fully integrate Verb's innovative technology into our HCM suite and increase PEPM, leveraging our broad distribution channel.
We expect the integrated offering to be available as part of our talent management bundle in the first half of fiscal year '24. Within our talent management bundle, we recently completed the integration of our new AI-driven recruiting technology, Paycor Smart Sourcing. We continue to see strong demand for this solution with more than 600 customers scheduled for activation. Building on Paycor's initial artificial intelligence innovation, Paycor Smart Sourcing and predictive resignation, we introduced our existing natural language processing and sentiment analysis engines into performance reviews and provide frontline leaders real-time feedback on the language they're using in evaluation to foster more humanized, engaging work culture.
We will continue to leverage AI in our platform to efficiently empower leaders like using generative AI to aid the recruiting process by generating job descriptions, along with several other exciting innovations on our product road map. Furthermore, we continue to lead the industry with the most extensive network of partners, deep two-way integrations and API connectivity points to meet our clients' unique business needs. In the last year, we added over 100 partners to our ecosystem to expand our reach and provide new capabilities and value for our customers. Lastly, we are proud that Paycor was recognized for its modern and differentiated platform with six Titan Business Intelligence Awards for our best-in-class talent management solution, Paycor Smart Sourcing, and insightful analytics that help frontline leaders optimize business decisions.
I would like to thank the entire Paycor team for these amazing results. With that, I'll turn the call over to Adam to discuss our financial results and guidance.
Adam Ante -- Chief Financial Officer
Thanks, Raul. I'll discuss our third quarter results and outlook for the remainder of the fiscal year. As a reminder, my comments related to financial measures are on a non-GAAP basis. We delivered another strong quarter with total revenues of $161 million, a 32% increase year over year and recurring revenue growth of 23% over the prior year, marking the sixth straight quarter of achieving our 20%-plus target and a testament to the consistent execution from our team.
Our revenue growth continues to be driven by new business wins and cross-sells, growing the number of employees on our platform to nearly $2.4 million, up 7% over the prior year with more than 30,000 customers. As we shift our portfolio upmarket and focus our resources on clients with greater than 100 employees, our average customer size continues to increase, now at 79 employees per customer, up from 75 last year. Aligned with this intentional strategic shift, we continue to see moderation in employee growth in the micro segment, while the number of employees in the mid-market and enterprise segments increased 9% year over year. This past quarter, our clients' employment level was essentially flat over the prior quarter, in line with our expectations and prior guidance.
As a reminder, organic employment levels among our existing customer base have typically only impacted revenue growth by one point or two, outside of an anomaly like COVID. All in, net retention continues to trend favorably with benefits from cross-sales and pricing increases, marginally offset by relative softness in our customers' organic hiring. Effective PEPM increased 15% year over year to just over $21 for the quarter. PEPM growth is comprised of three primary drivers, including cross-sales, pricing initiatives and higher bundle adoption at the point of sale.
This quarter, PEPM growth also benefited from strong form filing revenue, some of which we believe was pulled forward from the fourth quarter. We're also pleased with the progress we've made expanding our partner program, made possible by the investments in our interoperability engine. New incremental partner revenue streams, such as income and employment verification services and other software partnerships are expanding services to our clients and will increasingly contribute to our revenue growth into next year. In addition to the consistent revenue growth, we have also demonstrated steady margin expansion.
Adjusted gross profit margin, excluding depreciation and amortization, improved to 80.7%, nearly 300 basis points higher than last year as we continue to scale. Sales and marketing expense was $46 million or 29% of revenue, in line with our long-term targets, and we continue to invest as we expand our sales team nationally. On a gross basis, we invested $22 million in R&D or 14% of revenue, a similar level to last year and in line with our long-term targets. Our team continues to efficiently add new functionality through organic development, partnerships and best-in-class product tuck-ins that create value for our clients and expand our PEPM opportunity.
G&A expense was $19 million or 11.9% of revenue, down nearly 300 basis points from 14.6% in the third quarter of '22. We have made significant progress scaling and driving down G&A as a percentage of revenue. Year-to-date, G&A expense as a percentage of recurring revenue is more than 150 basis points lower than last year. Adjusted operating income increased nearly 60% to $39 million, with margins of 24%, up more than 400 basis points from 20% last year, while continuing to expand investments in sales and marketing and R&D.
Shifting to the balance sheet and cash flow. We generated $24 million of adjusted free cash flow, a net spend of $9 million year-to-date. We remain on track to deliver our plan to be free cash flow positive for the full fiscal year. At the close of the quarter, our cash balance increased to $83 million with no debt.
This quarter, we generated interest income of just under $11 million on average client funds of approximately $1.2 billion, yielding an effective rate of just over 370 basis points. The majority of our client funds remain in overnight accounts, which are capturing Fed fund rates faster and more completely. Our outlook on the HCM demand environment remains positive. The labor market remains tight as nonfarm payables continue to increase, though growth has moderated.
Job openings are at elevated levels and workforce participation remains well. Similar to last quarter, our guidance assumes no material change in the broader demand environment or labor market, which has been fairly consistent, and flat organic employee growth among existing customers for the balance of the year. Please keep in mind that we had a really strong fourth quarter last year compared to our two-year recurring revenue CAGR of 21% through the second quarter, and we are not anticipating the same outsized form filing benefit that we had this third quarter. Separately, while we are enthusiastic about the acquisition of Verb, it will be immaterial to our operations today.
With these factors in mind, we are once again raising our guidance for fiscal '23. For the fourth quarter, we expect total revenues of between $135 million and $137 million, or 24% growth at the high end of the range, and adjusted operating income of between $13 million and $14 million. For the full year, we expect revenues of $548 million to $550 million, or 28% growth at the top end of the range, and we anticipate adjusted operating income of $80 million to $81 million. With respect to interest income, we expect our effective rate to increase marginally in the fourth quarter.
And at today's rates, we anticipate interest income will be in the range of $30 million to $32 million for the full year on average client funds balances of just over $1 billion. We remain on track to reinvest about a third of our interest income and temporary programs to accelerate our product road map, expand marketing programs and invest in scaling the business. In summary, our modern HCM platform that empowers frontline leaders to improve employee engagement and retention is resonating with customers. Our team continues to execute.
We've demonstrated margin expansion as we scale the business and believe there is significant runway for further growth. As a mission-critical applications still early in its transition to the cloud, we believe in the durability of the category and our opportunity to continue capturing share within the expanding $32 billion HCM market. With that, we will open the call for questions. Operator?
Questions & Answers:
Operator
[Operator instructions] Our first question comes from Mark Murphy with J.P. Morgan. Please state your question.
Mark Murphy -- J.P. Morgan -- Analyst
Thank you. Congrats on the very nice results. Raul, when you look at the trends across your core verticals, healthcare, manufacturing, food and bev, professional services, are the demand patterns there aligning with kind of what we see in the broader economy? For instance, what I mean, is the services PMIs, they're showing expansion, the manufacturing PMIs are a bit softer. I'm just wondering if that kind of spread shows up at all in your bookings patterns or employment trends? And then, I have a quick follow-up.
Raul Villar -- Chief Executive Officer
No, we haven't seen any material changes in our performance across the four verticals. Obviously, we're still seeing a strong resurgence in food, beverage and accommodation across the platform, healthcare and manufacturing, a really big component of our total addressable market and our overall percentage. So we haven't seen any changes in our base or in our cadence.
Mark Murphy -- J.P. Morgan -- Analyst
Yes, understood. OK. And then, when we look around at product ratings and reviews, they do remain ultra strong for Paycor. I'm wondering, in which areas are you most excited about, kind of what you see in the R&D road map? And if you could just touch a bit on talent.
Those -- that module seems to have a pretty high ceiling on the attach rate, and I'm just wondering, if you're looking at that and feeling like that could become an ever larger mix of the revenue stream?
Raul Villar -- Chief Executive Officer
Yes. So obviously, the thing we're most excited about is as we continue to expand in the marketplace, we're finding that our platform is not only the easiest to use, but the most powerful in our competitive set. So we feel really good about that. From what we're most excited about, it's clearly talent.
Talent continues to grow. It is already a bigger part of our mix in workforce management. And so, we believe talent has the capability to be as big as payroll and HR. So there are so many components.
And in that, over time, we're going to continue to build out on that platform. And you can see that with our acquisition of Verb that we're focused on continuing to add niche components into the ecosystem there because there's strong demand to both source employees, but also to retain employees, and we believe it's going to be the next component of a core HCM module. And so, when I started this category, we sold payroll, HR became part of payroll over the next few decades. And we believe payroll, HR and talent will be the future definition of what a core HCM platform is, with workforce management and benefits still being based on the needs of the industry that you're serving.
Mark Murphy -- J.P. Morgan -- Analyst
Thank you very much.
Raul Villar -- Chief Executive Officer
Yeah. Thank you.
Operator
Our next question comes from Gabriela Borges with Goldman Sachs.
Kevin Kumar -- Goldman Sachs -- Analyst
Hi. This is Kevin on for Gabriela. Thanks for taking the question. I just wanted to double click on guidance.
I think it implies a higher sequential decline in recurring revenue in 4Q than prior years. So just curious maybe the moving pieces in terms of how much revenue was pulled forward and how you're thinking about normalized recurring revenue growth going forward?
Adam Ante -- Chief Financial Officer
Yes. We've tried to be consistent with the revenue guidance that we've put out over the last couple of years. A couple of the key things that sort of list off in the prepared remarks. The guidance assumes no material change in the broader demand environment and the labor market, which has been fairly consistent.
The flat organic employee growth, though, is what we've been seeing more recently that's trended over the last couple of quarters. So we're assuming that that persists into the next quarter. And then, like I mentioned, we did have a strong Q4 last year with some form filing revenue that we believe, in this quarter, isn't going to persist into Q4. And so, there's a little bit pull forward from Q4, not material, but on the margin, you're just seeing part of that as the guide into the Q4 or the fourth quarter.
Kevin Kumar -- Goldman Sachs -- Analyst
Got it. That's helpful. And then, it looks like seller hiring is on track. Just curious how retention is holding up? And then, ramp in sales productivity, is that tracking in line with your expectations, particularly more ramp reps that have been around for a year or two?
Raul Villar -- Chief Executive Officer
Yes. On seller retention, we continue to have strong retention, up significantly year over year. Productivity, despite strong hiring, our overall productivity is higher. So what that is -- would reference is that the people that are anniversary-ing into Tier 2 -- second year or third year are doing better.
So productivity continues to operate as designed.
Kevin Kumar -- Goldman Sachs -- Analyst
Thanks for taking my questions.
Raul Villar -- Chief Executive Officer
Thank you, Kevin.
Operator
Your next question comes from Samad Samana with Jefferies.
Samad Samana -- Jefferies -- Analyst
Hi. Good afternoon. Thanks for taking my questions. Maybe Raul, the first one for you, as you guys move up market and target 100 employee-plus companies.
One, does it change maybe the type of seller that you're trying to hire? And two, as it relates to the micro part of the business, are you just letting that naturally maybe attrit away? Or is that something where you're just investing less behind and just try to maybe think about through that dynamic?
Raul Villar -- Chief Executive Officer
Yes. I'll start with the first question about sellers and seller demographics. About two years ago, when -- or three years ago, when Chuck came on board, we changed the profile over the first nine months. And we've kept that profile.
And that profile is really focused on some of the three to 10 years business experience, high velocity, and we want to teach them HCM, and we want to teach them software sales. And so, it's been a successful model for us. We've been able to find applicants. We've been able to retain those applicants, and we've been able to drive productivity.
So we feel good about that. And we think that will -- those reps can scale through the entire segment that we're covering today. As far as the micro segment goes, we're not intentionally declining the segment. What I would say is we're investing more resources into the 100-plus segment.
And so, obviously, like our peers that focus on the SMB, the low end of the SMB segment like paychecks, etc., that low-end segment is going to have natural churn at a higher rate than your upmarket segment, and we're just not replacing at the same rate that we used to replace because we're replacing a five-employee company that leaves with 150-employee company.
Samad Samana -- Jefferies -- Analyst
Great. And then, maybe just a follow-up for Adam on the margin side. I'm not an economist, I have no idea what rates will do, but it seems like the prevailing view is that at least short-term rates might have peaked. I'm curious how you're thinking about getting margin from core operating leverage versus what floats contributing? And if your mindset is shifting as maybe we get a stabilization in rates overall and how we should think about that?
Adam Ante -- Chief Financial Officer
Samad, so first, I would say that, no, we're not going to shift our strategy. Our strategy has intentionally been about investing some of the interest expense -- or interest income back into the business, but that we want to continue to drive expansion on recurring margins. And so, you can actually see that in the adjusted gross margins on a recurring basis expanded year over year. It, of course, expanded with interest -- the interest income as well.
And G&A, specifically where you should see some additional leverage, we expanded that on a recurring basis. And that's part of our strategy. So we want to continue to drive that going forward. And then, we were opportunistic about taking some of that interest income and investing it back into the marketing and expanding the sales programs, and then also pulling forward the product road map.
And so, you see that showing up inside of our P&L today, where those on a recurring basis did not expand. But those programs were intentionally designed to be able to be turned off when we decided that either rates have peaked or we wanted to let that flow down to margin. So we have that opportunity, and that's how we continue to run the business is on a recurring basis, for sure.
Samad Samana -- Jefferies -- Analyst
Great. Thank you so much.
Raul Villar -- Chief Executive Officer
Thank you.
Operator
Your next question comes from Bhavin Shah with Deutsche Bank. Please state your question.
Bhavin Shah -- Deutsche Bank -- Analyst
Great. Thanks for taking my question and congrats on the strong results. It's nice to see the strong PEPM growth of 15% during the quarter. And I know there's plenty of drivers behind that, but any way to kind of break down just where the sources of growth are coming from? And how should we think about kind of PEPM growth going forward?
Adam Ante -- Chief Financial Officer
Yes. I mean, we break it down to sort of three groups. We look at pricing increases that we might be putting in cross-sell and upsell opportunities. And then, also, as clients are buying more at the point of sale, when they come on over the clients who are leaving on a net basis, they add additional PEPM to the stack as well.
I would say, typically, they represent about a third or a third each in terms of the total growth in each of those areas. This quarter, we saw a little bit outsized on the form filing. And so, I think that that was a little bit -- it's not going to persist in terms of the underlying PEPM growth rate, but we've seen the PEPM growth rate traditionally be in the sort of high single digit, low teens, and that -- those -- that breakdown is typically across those thirds, again, pricing, cross-sell, upsell, and then the new business coming in at a higher rate, and we think all those can persist in the near term.
Bhavin Shah -- Deutsche Bank -- Analyst
That's super helpful. And just kind of one follow-up on some of the seller growth that you talked about earlier. And you mentioned you continue to be on track for kind of 20%-ish seller growth. How should we think about hiring plans going forward? Is 20% going forward still a good starting point? And then, how much of that is maybe dependent on what you're seeing on the employment side or the macro perspective?
Raul Villar -- Chief Executive Officer
Yes. I mean, we're focused on driving top line bookings and in order to continue to accelerate our revenue growth. And so, we've been fairly confident that we can continue to add coverage, and that's what we're focused on. We're not seeing anything in the macro that would suggest that we want to pull back on seller headcount.
Bhavin Shah -- Deutsche Bank -- Analyst
Thank you.
Raul Villar -- Chief Executive Officer
Yeah. Thank you.
Operator
Your next question comes from Terry Tillman with Truist Securities.
Terry Tillman -- Truist Securities -- Analyst
Hi, Raul, Adam and Rachel, congrats from me as well on the quarterly performance. I guess maybe the first question, Raul, for you is, if we kind of dissect these kind of higher-growth Tier 1 market opportunities that you're really putting some good new seller capacity into versus traditional strengths of like Midwest, Great Lakes and Tier 2, could you maybe comment, I know overall, you had record bookings, but how did Tier 1 do in terms of the strength versus your expectations? And then, those markets that were your bread and butter a long time ago Tier 2?
Raul Villar -- Chief Executive Officer
Yes. I mean, we have fairly strong performance across the board. Clearly, Tier 1 is over 50% of our results in new bookings. So we've started to see that transition away from being dependent on just the Midwest to drive bookings growth.
And so, we're seeing more balanced participation, but 54% of our bookings is coming from Tier 1, and we feel pretty good about that. We're going to continue to drive that forward.
Terry Tillman -- Truist Securities -- Analyst
That's great. It sounds pretty bullish. I guess maybe just a follow-up, and I don't know if this is for you, Raul or Adam, but I didn't have an expectation per se on Smart Sourcing and how the activation was going to go. But I think I heard in Raul's prepared remarks, you've got about 600 customers on Smart Sourcing that you're kind of rolling out or activating.
So how is that versus your initial kind of thoughts on where you'd be at this point? And I assume that's not per every employee. Maybe that's just for the folks in kind of the recruiting side. What is that driving in terms of kind of an average customer kind of ARPU lift or ASP or contract value lift?
Adam Ante -- Chief Financial Officer
Yes. Terry. So yes, first, I'd say that we're really excited about the traction that we're seeing with all of our AI products and then specifically on Smart Sourcing. We've been able to, through the integration, get there a little faster than what we were planning for in the first place, and then the adoption and the excitement from a customer perspective has been really strong.
So at that 600-unit mark, we're earlier than what we had anticipated, we're getting there a little faster. And in terms of how we're taking it to market, it's going to be -- it's effectively a couple of dollars per employee, and that's going into the bundle in terms of how we're selling it as part of our talent attraction suite now. And we've seen that. Again, we've seen it sort of sell itself.
Of course, I think, at the time of the market, it is really great for AI. Folks are really interested. And then, the product just hunts really well as well. I mean, it comes at the perfect time where folks are looking for access to talent.
They're struggling with it. And so, that sort of $2 space is where we're taking it to market today.
Terry Tillman -- Truist Securities -- Analyst
That's great. Thank you.
Operator
Your next question comes from Bryan Bergin with TD Cowen. Please state your question.
Bryan Bergin -- TD Cowen -- Analyst
Hey, guys. Good afternoon. Thank you. Just one from us here.
Just taking into account everything you're seeing right now in the demand environment and your kind of 4Q view, as we think forward here for fiscal '24, any thoughts and considerations we should be mindful for around growth and margin?
Adam Ante -- Chief Financial Officer
Yes. I mean, we haven't given anything specific to '24 yet. I'd say that we want to continue to see how the quarter wraps up. And everybody has been talking about the pressure in the second half of the year, so I think it's going to be important for us to see what happens through June, July, August, as we give guidance into '24, for sure.
We want to be -- I think we would say the demand environment and the opportunity for HCM broadly is still a massive opportunity. And we feel good about the long-term sort of recurring nature of the business. So we're going to continue to be bullish there. And I think we're going to want to be consistent into next year.
So we've consistently been trying to drive the 20% plus recurring revenue growth, and continuing to expand margins across the business. That's going to be our strategy going into next year. And then, we'll evaluate the demand environment, broader growth, and have to make decisions accordingly as we think about guidance into the summer months.
Bryan Bergin -- TD Cowen -- Analyst
OK. Actually, I'm going to squeeze one more in. Just on retention. Can you give us a sense on kind of how the gross retention -- revenue retention compared versus last year? Just any changes to be mindful of in sub-1,000 or 1,000-plus mix?
Adam Ante -- Chief Financial Officer
Yes. Well, across the business, Bryan, it's been really consistent. So we continue to be in the high 90% range, really consistent over the last couple of quarters. And I'd say, we have seen a little bit of that dip in that micro segment, like we've talked about, right? The retention in that micro segment where you've seen a little bit of the softening in the organic pace per control and their hiring, we are seeing that, but it's not affecting our overall net retention numbers.
So overall, it has been consistent.
Bryan Bergin -- TD Cowen -- Analyst
OK. Great. Thank you.
Adam Ante -- Chief Financial Officer
Thanks, Bryan.
Operator
Your next question comes from Scott Berg with Needham. Please state your question.
Scott Berg -- Needham and Company -- Analyst
Hey, Raul, Adam and Rachel, congrats on a nice quarter and thanks for taking my questions. I guess I got a couple. First, I wanted to start with your sales and marketing spend in the quarter. It had a bigger sequential jump from your second quarter number than you have for as far back as my model goes.
I just want to try to help understand what that jump in particular means? Just because it kind of stood out in the model.
Adam Ante -- Chief Financial Officer
Yes. I mean, a bit of it is the continued press into new hiring and sales expansion, as well as some of the additional demand programs that we've been running that we've been talking about incrementally that we layered into in the middle of the year or beginning sort of in the first quarter. And so, some of those programs really were in full swing toward the end of last year in that November, December timeframe, and then really the full quarter here for the Q3 period.
Scott Berg -- Needham and Company -- Analyst
Got it. Helpful. And then, from a follow-up question as we all are getting these over the last 30, 60, 90 days. Help us understand what you think the impact would be from these newer generative AI solutions on the HCM space.
I think there's a lot of opportunity. I've been sniffing around this for the last couple of weeks, but I don't think the average investor really looks at HCM as maybe a space or a sector that can benefit from these technologies. How do you all have a kind of viewpoint on those opportunities?
Adam Ante -- Chief Financial Officer
Scott, I mean, I think that we're really excited. We've been investing in the space around AI for the last couple of years. It's not a brand-new idea for us. And you could see it show up in the solutions like Talenya and Smart Sourcing and how we're bringing it into applicant tracking.
We're releasing some other things as well. Sentiment analysis just came out for us, helping folks write performance reviews and understanding how the sentiment of how they're describing it to their employees and to the associates. Churn prediction and the churn predictor has been in the product for the last couple of years as well. So that's been a place that we've been playing.
Something that's coming out real recent or real soon is job description generators. And so, you'll see some more stuff from us around enabling our customers to be able to write job descriptions more quickly and more effectively and line it up across industry best practices. And there's a couple of other things that are on the come for us as well. And we're thinking about it, of course, inside of the product, but then how we can use it internally for our infrastructure, for productivity to drive additional -- better assist internally for our customers support reps.
So we're really excited about the opportunity, and we're continuing to leverage the investments we've been making for the last couple of years to continue to accelerate it.
Scott Berg -- Needham and Company -- Analyst
Great. That's all I have. Thanks for taking my questions.
Raul Villar -- Chief Executive Officer
Thanks, Scott.
Operator
Your next question comes from Brad Reback with Stifel. Please state your question.
Brad Reback -- Stifel Financial Corp. -- Analyst
Great. Thanks very much. I know you guys haven't guided to next year yet, but as we think about the piece parts of the business with recurring being guided to in sort of the upper teens this quarter, and I know there are some difficult comps because of the pull forward. But is that a good starting place roughly for the recurring revenue for next year?
Adam Ante -- Chief Financial Officer
Yes. I mean, we'll clearly give the guidance when we get through -- get into the first quarter, and we'll shape it up. I mean, we -- overall, I would say, our strategy to continue to drive to 20% recurring over the right period is still our strategy and continue to drive margin expansion. In any one quarter, we're going to have to -- we'll take a different level of diligence in terms of how we guide to it.
But our strategy is not changing right now. And in the face, of course, of a changing demand environment, we'll have to be considerate about that. So the longer that we have to take a look at that, see what's happening in the broader macro environment, I think that's going to be important for us as we think about it. But the broader strategy and the composition and the structure of the business, that's not shifting in any material way in the near term to make us think differently about the opportunity.
Brad Reback -- Stifel Financial Corp. -- Analyst
That's great. Thanks very much.
Adam Ante -- Chief Financial Officer
Thanks, Brad.
Operator
Your next question comes from Brian Peterson with Raymond James. Please go ahead.
Brian Peterson -- Raymond James -- Analyst
Thanks, guys and I'll echo my congrats on the strong quarter. So just one for me. Raul, you mentioned the partners that are ramping up. I'm just curious, as you scale the kind of geographic presence in the product portfolio, does the ramp to revenue from those partners become quicker? Or is it kind of the same education? I'd love to maybe unpack that a little bit.
Adam Ante -- Chief Financial Officer
Yes. I mean, there are some software partners where we're -- that are going to take a little bit different of timing as we layer them in. I think then, what you might see historically in the market, and so we have talked a little bit about some of the software partnerships that we're creating, and they're really exciting, both for our customers and then the opportunity to continue to expand the services that we're providing to our customers. And those relationships take a little bit longer to stand up.
So it is part of a little bit about what we've been seeing, especially in the enterprise space. Some of those just broader partnerships take a little bit longer, will bleed into the '24, like we had mentioned in the prepared remarks, sort of really ramping up revenue into '24 and beyond.
Brian Peterson -- Raymond James -- Analyst
Got it. Thanks, Adam.
Operator
Your next question comes from Mark Marcon with Baird. Please state your question.
Mark Marcon -- Baird -- Analyst
Hey. Good afternoon and thanks for taking my questions. No. 1, with regards to talent, Raul, you mentioned, eventually, it could end up being as big as payroll or HR.
How penetrated is talent right now within the existing client base, and what's the plot for going back to existing clients to ramp that up?
Raul Villar -- Chief Executive Officer
Yes. I mean, it is -- we're in the early innings of cross-selling talent into the base. As we've continued to expand the suite, we have a great opportunity to cross-sell it back into our clients. And so, we have a team of over -- of cross-sellers that focuses on bringing these new solutions into our client base.
And so, we continue to see good penetration there, which is driving it. It's one of the three components of -- Adam talked about that, lifts our PEPM, and we're continuing to see that growth.
Mark Marcon -- Baird -- Analyst
Great. And then, can you talk a little bit about in terms of the recurring revenue growth, what percentage was from new logos as opposed to cross-sell? Obviously, there's form filings in there. But in terms of just thinking about it year over year over the course of this last quarter?
Adam Ante -- Chief Financial Officer
Yes. Yes. What we see, Mark, is typically about a third of the growth that comes from the PEPM growth is from cross-sell, upsell opportunities. And so, that's how you might think about that 15%.
It's a little less than a third because we sort of outsized in a couple of other areas this quarter. But that's typically what we see from the growth in the cross-sell, upsells.
Mark Marcon -- Baird -- Analyst
Great. And then, just the implied recurring revenue guide, if we're going to be $30 million to $32 million, if we're assuming $32 million in terms of float income for the year, how much was the -- how much was the form revenue in the year ago quarter relative to what you're expecting this year?
Adam Ante -- Chief Financial Officer
Yes. I mean, what we normally see, especially in the third quarter, is that we're generating high teens of our total recurring and other revenue is related to form filings. And then, you get sort of low single digits in non-Q3 quarters. And so, we were definitely at the high side of that here for Q3, and then we'll be maybe one point or two lower in the Q4 period, which typically, as we look back, it just tends to be a little bit more moderated in the Q3 period.
Operator
Thank you. And our next question comes from Kevin McVeigh with Credit Suisse. Please state your question.
Kevin McVeigh -- Credit Suisse -- Analyst
Great. Thanks. Thank you. Is there any way to think about the growth in the PEPM relative to the average client size? I mean, you like the average client's, I think, around 79 employees, up from 75.
How much of that is driving the PEPM growth as opposed to just the natural evolution of the client size as opposed to maybe other factors?
Adam Ante -- Chief Financial Officer
Yes. Actually, smaller clients have a much larger PEPM. So what we see in the micro space is that those clients tend to pay two to three times as much on a PEPM basis because the pricing strategy has like larger base fee, right, in those smaller clients. But what's happening really is that as new clients are coming on, they're buying a more complete part of the solution.
So they tend to adopt more products. They pick up the talent solution, and we have a bundle strategy that not all of our clients historically have. And so, as we continue to grow the average client size, those clients are coming on relative to their similarly sized peers and they're buying more products. So that's really the dynamic.
It's not necessarily that the PEPM increases. The larger clients tend to get a little bit of scale as they have pricing power.
Kevin McVeigh -- Credit Suisse -- Analyst
Got it. And then, as you drive more ChatGPT, are you going to be able to slow the rate of sales force hire and still maintain the growth? Just I guess, is there going to be more efficiency in the sales force as this AI kind of permeates itself? Or would it -- if we keep the rate at sales force growth constant, it accelerates revenue overall? How should we think about that?
Raul Villar -- Chief Executive Officer
Yes. The way we think about it is we are still expanding out our sales force, but we're making great progress. So we're getting closer to the point where we can start to decelerate hiring, or it could be next year or the year after, and drive more productivity. And that productivity will be through programs that can help make the sales team more productive and continue to drive productivity, whether that's through selling more product, whether that's through having more tenure, continued acceleration of a very strong win rate.
There's a lot of different components that would drive individual productivity. And so, that's kind of how we map out the future is as we have every territory covered, that we can then flex the productivity, which would yield more margin back to the business.
Kevin McVeigh -- Credit Suisse -- Analyst
Makes sense. Thank you.
Raul Villar -- Chief Executive Officer
Yep.
Operator
Your next question comes from Daniel Jester with BMO Capital Markets. Please go ahead.
Daniel Jester -- BMO Capital Markets -- Analyst
Hey. Good evening. Thanks for taking my question. Can you just spend a moment walking us through how you see the regulatory environment for AI with regards to hiring and some of the performance reviews and the like? It feels like there's a patchwork of state and local kind of rules that are being formed around this.
And I just wonder, as you introduce this into the toolkit for your customers, what's their concern level about the regulatory environment? And how much of an impact should we think that has going forward?
Raul Villar -- Chief Executive Officer
Yes. Great question. Obviously, it's on everyone's top of mind, and we've been really thoughtful about how we do it. And we're on the front end, we're really taking feedback from the hiring managers on what they're looking for.
So it's just to source, it's not to select, which is an area that has far more scrutiny. And then, secondly, as far as performance reviews, it's really about helping coach the frontline leader on how their performance review is coming across. Is the verbiage positive? Is it negative? Does it match the sentiment of the review that you're trying to write? And so, we've been very careful on the technology that we use. Obviously, our legal team is continually evaluating different laws and regulations to make sure that we comply with all those jurisdictions.
But ultimately, we feel like we're in a good place, and the products that we're selecting are kind of focused on helping frontline leaders be more effective in their jobs and not really about who to select.
Adam Ante -- Chief Financial Officer
Dan, as we think about things like candidate sourcing, I mean, we do think that it's important that we understand the AI that there's transparency and that we're applying it ethically and people understand what any sort of biases may or may not exist inside of those models, and it's complicated, right? And so, I think we're working intentionally about it. We're interested in how regulators are going to come out more explicitly, whether they're state, whether it's federal, and how we can help to provide that level of transparency to our customers, so they feel good about it. I would say that we don't hear it as a primary concern of folks. When they see the product, they're really excited about it.
But that's not what drives us forward. I mean, we want to, like I said, continue to build AI responsibly into the product and ethically make sure people understand. It's especially important for us being an HCM where we're focused almost entirely on people and leaders.
Daniel Jester -- BMO Capital Markets -- Analyst
Gotcha. Maybe just a second one. Can you remind me where we are on the journey from shifting customers to the -- from the per paycheck model to the PEPM model? Where are we there?
Adam Ante -- Chief Financial Officer
Yes. So most of that shift has really been focused in the what we would call the SMB market, under 50 in the micro segment. And we have moved the majority of those clients over to our bundle strategies and subscription models. We're not going to take that sort of direct approach in the mid-market and when we get up into our enterprise clients.
That will take longer. So -- just because we want to be more intentional about those specific contracts and how their current billing status is. And so, we'll migrate those over time when it's right for the client, when they're interested in more products or when they're evaluating. And so, we're sort of over 50%, well over 60% in terms of the portfolio today of how much revenue is going through those bundles.
And that will continue to progress as we begin moving into the mid-market and enterprise clients.
Daniel Jester -- BMO Capital Markets -- Analyst
Great. Thank you very much.
Operator
And our next question comes from Robert Simmons with D.A. Davidson. Please state your question.
Robert Simmons -- D.A. Davidson -- Analyst
Hey. Thanks for taking my question. So speaking of float revenue. I was wondering, given how rates seem to be stabilizing, when do you think float revenue growth kind of normalizes and approximates recurring revenue growth?
Adam Ante -- Chief Financial Officer
Yes. So I think next year, rates will -- if rates were to be normal or flat, I should say, over where they sit today, there will still be some growth into next year. And of course, there's a lot of variables around that in terms of where the rate environment goes ultimately. But if they were to sit in -- at this rate, they would effectively be growing over the Q1 -- first quarter primarily.
And there's -- with the 25 basis point increase, I mean, there's marginal growth here that we're going to see just a couple more dollars into Q4. You're not going to see much change there. But then next year, they would sort of flatten out. And of course, if you look at the yield curve, I think the market has a different perspective on what the Fed's going to do.
But we're not going to try to be aggressive there and chase rate. We're just going to sort of deal with it so that we don't put ourselves in a sort of unhedged position.
Robert Simmons -- D.A. Davidson -- Analyst
Got it. Great. And then, can you talk about what you're seeing, variability changes from what some of your competitors are doing in terms of price, in terms of offerings or anything like that?
Raul Villar -- Chief Executive Officer
Yes. There really hasn't been any shift in the competitive environment from last quarter. I would say it's fairly static.
Robert Simmons -- D.A. Davidson -- Analyst
Great. Thank you very much.
Raul Villar -- Chief Executive Officer
Thank you.
Operator
Your next question comes from Steve Enders with Citi. Please state your question.
Steve Enders -- Citi -- Analyst
All right. Great. Thanks for taking the questions here. I appreciate the strength in the bookings -- or new bookings in the quarter.
Just wondering, I guess, how does that kind of translate across the different customer sizes? And how should we think about the upper market execution in this past quarter to drive that strength?
Raul Villar -- Chief Executive Officer
Yes. I mean, all three of our market segments had really strong quarters, our cross-sell team, our SMB team and our mid-market team. And our enterprise segment continues to grow at a really strong rate. So we had really, across the board, strong quarter in all the segments.
Our win rates remain strong. And our deal pipeline, is as strong as it's ever been. So we feel really good about where we are in the demand environment.
Steve Enders -- Citi -- Analyst
OK. I guess kind of digging into that last comment around the pipeline and the deal environment. I think if I remember it from last quarter, maybe the micro segment was a little bit weaker maybe just on the employee side that there's some softness there. But I guess any kind of view into where the pipeline is across the various segments, and if you're seeing maybe some of that continued weakness on the micro side of it?
Raul Villar -- Chief Executive Officer
Yes. I mean, so to put it in perspective, Steve, like if you think about the overall composition of bookings on average, you're going to get about 5% of our overall bookings in the SMB segment under 50. You're going to get about 15% in cross-sell, and the remaining 80% is going to be in our mid-market sales, which goes from 15 employees up into the low end of enterprise. And that's not changing.
And so, it's been fairly consistent, the mix. And so, what -- like the micro segment, whether -- the softness we had was more in our installed base, where they weren't seeing organic growth in their clients. But by and large, we're not seeing any changes in our bookings distribution.
Steve Enders -- Citi -- Analyst
Got you. OK. No, very helpful context there. And then, last question for me.
As we think about the bundle, I appreciate the talent has been resonating a little bit more there, but any way to kind of think about across the new customers coming in? How much is that kind of new bundle or a broader bundle being adopted today versus maybe where it was a year ago?
Adam Ante -- Chief Financial Officer
Yes. We continue to see the attach rate increase. And versus a year ago, I'd say that there's probably five- to 10-point change positively. It's not a massive movement on the attach rate, but it continues to trend positively.
And it does contribute pretty well to the overall ADS and the PEPM that we're picking up, part of what's driving the overall effective PEPM rate increase.
Steve Enders -- Citi -- Analyst
OK. Perfect. Thanks for taking the questions.
Operator
Your next question comes from Jackson Ader with SVB MoffettNathanson. Please state your question.
Jackson Ader -- SVB MoffettNathanson -- Analyst
All right. Great. Good evening, guys. Thanks for taking my questions.
The first one. Adam, you made the comment about larger customers getting a bit more scale on their PEPM. But I'm just curious how much pricing and how much does like-for-like pricing between you guys and your competitors end up becoming a factor in customer decisions? And is that -- is there any difference either in the mid-market versus enterprise? How much pricing plays a factor?
Raul Villar -- Chief Executive Officer
Well, I think -- it's Raul. I mean, clearly, larger customers have more pricing power, and just in sales in general in any category, right? And so, we see PEPM decline would size. And so, it's kind of natural, and that's just -- nothing has changed. It's not accelerating.
It's very similar as it's always been. What I would say is every deal is competitive and individually negotiated. And so, that's why you see a difference between maximum available PEPM and realized PEPM. That's one component, right? One component is how many modules they buy? Do they buy the whole suite or a part of the suite? And the second component would be the discounting component.
And so, I think, by and large, that pricing has been consistent, and we've seen no behavioral changes in any of our competitors.
Jackson Ader -- SVB MoffettNathanson -- Analyst
Gotcha. Well, I actually have a follow-up to that, though. Is it -- because we've been hearing from ADP that their retention rates have been kind of ticking up. And I'm just curious, is there a possibility for you guys to use maybe pricing as more of a weapon in order to take more share from some legacy incumbents?
Raul Villar -- Chief Executive Officer
I mean, that hasn't been a strategy that we've gone after. We've really been focused on the value prop and what we deliver. And I think how people calculate retention is different, right? And so, I would suggest that that's a revenue retention number based on a lot of businesses that have nothing to do with what Paycor does and ADP.
Jackson Ader -- SVB MoffettNathanson -- Analyst
Gotcha. OK. Noted. Thank you.
Adam Ante -- Chief Financial Officer
Thanks, Jackson.
Operator
Our next question comes from Matt Pfau with William Blair. Please state your question.
Matt Pfau -- William Blair and Company -- Analyst
Great. Just wanted to ask one on the Verb acquisition. So maybe what attracted you with Verb versus other options? And why did you feel that this was an important hole to plug in your platform?
Raul Villar -- Chief Executive Officer
Yes, a couple of things. One is from an overall demand perspective, there's an ongoing shift from LMS to micro learning. Most of -- my three children have the attention span of like three minutes long. And so, we want to make sure that we're meeting the market, right? So the days of 30-minute online LMS training courses is probably going to be gone.
And so, we want to be part of the next generation of technology and how do you provide bite-sized chunks to people and then allow them to reflect and learn on it. Secondly, all female leadership team, that's amazing. And we were really excited about being able to add them to our team. And so, the combination of a really cool modern product that is meeting the needs of people in the workforce and that our leaders can use to coach their employees to better outcomes and a great leadership team is why we decided it was a perfect fit for us.
Matt Pfau -- William Blair and Company -- Analyst
Great. Thank you.
Raul Villar -- Chief Executive Officer
Thank you.
Operator
There are no further questions at this time, so I'll hand the floor to Raul Villar for closing remarks.
Raul Villar -- Chief Executive Officer
Thank you again for joining our conference call this evening. I would like to take this opportunity to thank our associates for contributing to these excellent results. We are encouraged by the underlying fundamentals of the business and remain focused on executing our strategy. We look forward to connecting with you at the JPMorgan Global Technology, Media and Communications Conference in Boston, and Baird Global Consumer Technology and Services Conference in New York over the coming weeks.
Have a great night, everyone, and happy birthday to my sister, Melissa.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Rachel White -- Vice President, Investor Relations
Raul Villar -- Chief Executive Officer
Adam Ante -- Chief Financial Officer
Mark Murphy -- J.P. Morgan -- Analyst
Kevin Kumar -- Goldman Sachs -- Analyst
Samad Samana -- Jefferies -- Analyst
Bhavin Shah -- Deutsche Bank -- Analyst
Terry Tillman -- Truist Securities -- Analyst
Bryan Bergin -- TD Cowen -- Analyst
Scott Berg -- Needham and Company -- Analyst
Brad Reback -- Stifel Financial Corp. -- Analyst
Brian Peterson -- Raymond James -- Analyst
Mark Marcon -- Baird -- Analyst
Kevin McVeigh -- Credit Suisse -- Analyst
Daniel Jester -- BMO Capital Markets -- Analyst
Robert Simmons -- D.A. Davidson -- Analyst
Steve Enders -- Citi -- Analyst
Jackson Ader -- SVB MoffettNathanson -- Analyst
Matt Pfau -- William Blair and Company -- Analyst
