Paycor HCM (PYCR) Q1 2024 Earnings Call Transcript

Paycor HCM (PYCR 1.36%)
Q1 2024 Earnings Call
Nov 08, 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 first quarter fiscal year 2024 earnings call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator instructions].

As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Rachel White, vice president of investor relations. Please go ahead.

Rachel White -- Vice President, Investor Relations

Good afternoon, and welcome to Paycor's earnings call for the first quarter of fiscal year 2024, which ended on September 30. 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 may not be updated in the future. Therefore, these mentioned may not be relied upon as representing our views as of any subsequent date. We also will refer to certain financial measures and key business metrics to provide additional information to investors.

Definitions of non-GAAP measures and key business metrics and a reconciliation of non-GAAP to GAAP measures are 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 first quarter results. We had a strong start to the year with revenue growth of 21% this quarter. We drove margin expansion of nearly 200 basis points year over year while continuing to invest in differentiating our platform, which increases the value of our HCM suite to our customers and expand our future PEPM opportunity.

The demand environment remains solid for our innovative HCM that empowers leaders to unlock the potential of their people and business performance. As we shift upmarket, clients tend to purchase a more complete solution, and average deal size and attach rates continue to expand nicely. Our deal pipeline is up year over year, and win rates remain strong. Our team is making significant progress on our two strategic growth initiatives: expanding sales coverage and increasing the amount we charge per employee per month or PEPM.

We are on track to deliver on our full-year sales headcount growth target of approximately 20% and sales productivity is progressing in line with our expectations. This quarter, we announced a new go-to-market leveraging our industry-leading interoperability engine. Paycor has a substantial opportunity to partner with technology firms such as vertical-focused SaaS solutions. Existing software partners offer our embedded HCM solutions nested within their platform for a seamless client experience.

Legacy house solutions are right for disruption as the HCM requirements continue to increase in complexity and demand for more than just the payroll solution. We are the only HCM provider with an embedded mid-market offering, and we have a growing pipeline of interested partners. The larger embedded HCM partnerships we mentioned last call will increasingly contribute to our revenue growth in the second half of fiscal 2024 and be accretive to margins in fiscal '25. This quarter, we enhanced our modern award-winning HCM suite with value functionality that powers people and performance.

Our list PEPM of $51 increased $9 or 21% year on year, which equates to a PEPM of $612. Further strengthening our suite of artificial intelligence solutions, we recently released a new generative AI analytics, digital assistant powered by Visier. The new offering empowers leaders to quickly and easily consume people-focused analytics and a conversational chat interface. We are helping leaders save time and resources by seamlessly providing them with the answers they need to effectively power their team.

We continue to see excellent adoption of the talent solution we launched in fiscal 2021, with revenues up 40% year over year. We're also proud that Nucleus Research recently recognized our talent acquisition suite as a market leader. I'm also incredibly pleased with the promotion of Brett Meager, the chief customer experience officer, where she will lead our next generation of surveys, leveraging data and technique to best serve our customers. And this new role, Brett will unify Paycor's implementation and service and loyalty organization further enhancing the company's relentless focus on creating an irresistible customer experience.

Lastly, I am proud Paycor received several culture excellence awards by Top Workplaces. This is the third consecutive year we have been recognized for promoting DE&I practices. And the first time we were acknowledged for employee appreciation, employee well-being, and professional development. As a human capital management company, we know firsthand how important leaders and culture are in driving employee engagement and business performance.

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 first-quarter results and share our outlook for the second quarter and fiscal year. This quarter, Paycor generated total revenues of $144 million, an increase of 21% year over year. Recurring revenue grew 16% year over year, slightly above our guidance as labor market growth of 2% marginally outperformed our zero to 1% assumption.

Recurring revenue growth is largely driven by increasing the number of employees on our platform and the amount we charge per employee per month. We have more than 2.5 million employees on our platform, up 9% over the prior year across more than 30,800 customers. As we shift our portfolio upmarket, our average customer size continues to increase and now stands at 83 employees per customer, up from 78 a year ago, supported by even stronger growth in enterprise customers. In line with this shift, the number of employees in the mid-market and enterprise grew 11% year over year, while growth in the micro segment remained flat.

Additionally, about one point of our employee growth this quarter is from our embedded HCM solutions. In conjunction with our transition years ago to being a modern cloud HCM platform, we price our solutions on a PEPM model. This pricing model has enabled us to combine our pricing, employing a bundled offering approach and reduce friction in the adoption of our broader set of HCM solutions. We believe our cloud platform and pricing model provides much better value and predictability for our customers and for Paycor.

As our HCM suite has expanded, more than half of our revenue is generated from nonpayroll HCM solutions such as talent and work management. All of which is on a PEPM pricing model. Effective PEPM increased 6% year over year to more than $17 for the quarter, driven by continued expansion of our product fleet, PEPM growth has been fueled by a combination of cross-sales pricing initiatives and higher bundle adoption. We are seeing steady PEPM contribution from cross-sales and higher bundle adoption.

However, we expect more moderate contributions from pricing initiatives as inflation flows and new business as we onboard larger enterprise and embedded HCM technology partners with greater pricing power, which will be offset by higher average deal sizes and stronger margins. Our primary objective remains sustainable 20% plus recurring revenue growth. We've consistently expanded margins as we scale a bit. Adjusted gross profit mark, excluding depreciation and amortization, improved to 78.3%.

And more than 140 basis points higher than the prior year while continuing to invest in differentiating our client experience. Sales and marketing expense was $47 million and 33% of revenue, similar to levels a year ago as we increased sales coverage nationwide capital market share. On a gross basis, we invested $25 million in R&D, or 17% of revenue to enhance our HCM platform and expand our PEPM opportunity. On an annual basis, we expect to invest 15% to 16% of revenue, similar to levels last year.

We are driving leverage in G&A as we scale the business. G&A expense was $20 million or 13.7% of revenue, an improvement of 120 basis points from last year. Adjusted operating income increased more than 50% to $16 million with margins of 11.1%, up over 200 basis points from 8.8% layer, while we continue to make strategic investments to accelerate sales elevate service and differentiate our products. As typical in the first quarter due to the timing of our bonus statement, adjusted free cash flow was negative $40 million.

We expect to generate greater adjusted free cash flow for the full year and for free cash flow margins to expand faster than adjusted operating income as we scale the business. We ended the quarter with $54 million of cash and no debt. For fiscal 2024, we remain focused on execution, scaling the business, and driving margin expansion. The demand environment remains resilient with higher top-of-funnel demand than we had a year ago.

Our leader value proposition continues to resonate, and we're delivering compelling value for clients to transition from legacy to it. The labor market remains high, and our guidance assumes flat organic employee growth among existing customers for the remainder of the year. For the second quarter, we expect total revenues of between $154.5 million and $156.5 million, or 18% growth at the high end of the range. And adjusted operating income of between $19.5 million and $20.5 million.

For the full year, we expect revenues of between $648 million to $654 million or 18% growth at the top end of the range, and we anticipate adjusted operating income of $102 million to $106 million. This quarter, we generated $11 million of interest income on average client fund of just over $1 billion at an effective rate of about 425 basis points. Based on current rates, we expect interest income in the range of $44 million to $45 million for the full year. The combination of labor market growth comps moderating year over year and larger enterprise customers and embedded a team partner starting provides confidence in our second half revenue growth accelerated.

Overall, demand remains healthy and our innovative HCM solution that powers people and performance is winning in the market. We are demonstrating margin expansion as we scale the business and believe there is significant opportunity to drive further leverage. As the mission-critical applications so early in transition to the cloud, we believe there is significant runway for sustainable growth in the $38 billion HCM market. With that, we'll open the call for questions.

Operator?

Questions & Answers:

Operator

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator instructions] Our first question is from Gabriela Borges with Goldman Sachs. Please go ahead.

Kevin Kumar -- Goldman Sachs -- Analyst

Hi. This is Kevin Kumar on for Gabriela. I wanted to ask if there's any changes in how you're thinking about linearity of recurring revenue for the year particularly any color on enterprise pipeline and overall timing of go-lives would be very helpful. Thank you.

Adam Ante -- Chief Financial Officer

We talked through a little bit of those enterprise and large partnerships that we're really going to come live and start to contribute more in the back half of the year and things are looking really consistent. So, no real change from how we were thinking about it just a couple of months ago.

Kevin Kumar -- Goldman Sachs -- Analyst

That's helpful. And then maybe just on cross-selling. How should we maybe think about the cadence of cross-selling for the year? What segments of the market are there opportunities to drive further penetration in modules, particularly talent management?

Raul Villar -- Chief Executive Officer

Yeah. We've had -- Kevin, we've had really strong, consistent cross-selling across all sizes of the enterprise. Obviously, talent continues to outperform the rest of the portfolio. as people are still looking to attract and retain quality associates.

And so, we feel really good about our cross-selling motion that we have in process there.

Kevin Kumar -- Goldman Sachs -- Analyst

Great. Thanks for taking the questions.

Operator

Our next question is from the line of Bhavin Shah with Deutsche Bank. Please go ahead.

Bhavin Shah -- Deutsche Bank -- Analyst

Great. Thanks for taking my question. Can you guys just speak about what you're seeing in terms of the broker channel and how that's helping from a full basis? Have you seen any kind of change there? And any kind of some of the investments you're making into that opportunity?

Raul Villar -- Chief Executive Officer

Yeah. We're really bullish on the broker channel. The percent contribution to our overall bookings is still around 50% in the field bookings. We continue to focus on our large national partners and we're getting an outsized performance in those cohorts.

So, we're excited. We think we have a winning formula with brokers. We grew the number of brokers that we partnered with year over year, and we continue to see really solid participation in the channel.

Bhavin Shah -- Deutsche Bank -- Analyst

That's helpful. And I know during the quarter, you guys kind of unveiled your embedded HCM solution. Can you just talk a little bit more about the longer-term opportunity here and how your go-to-market for this product differs from competitors offering kind of embedded payroll?

Adam Ante -- Chief Financial Officer

Yeah. So, first, we think there's a huge opportunity. I mean, there's thousands of software players who could merge a service like ours, HCM, and payroll capabilities, many of them are trying to offer their services today and find that when they work through our offering that it just makes more sense to us. And we think that it's a great go-to-market from that perspective to be able to create.

For them to be able to create more in a differentiated service really helps us to be able to expand more quickly across services -- across markets where we usually have a -- we'll be able to provide a deeper coverage across more of the market at a faster pace. And in terms of the go-to-market strategy for us, I mean, it's really around finding those new partnerships and making the right bets on great partners early. And we've had a really strong pipeline, a lot of really great interest, and some key partners that are winning already today.

Bhavin Shah -- Deutsche Bank -- Analyst

Thank you.

Operator

Our next question is from the line of Terrell Tillman with Truist Securities. Please go ahead.

Terrell Tillman -- Truist Securities -- Analyst

Yeah. Hi, Raul, Adam, and Rachel. Nice job in the quarter. So, actually, I want to build on the embedded HCM question.

That's my first question. It might be a multiparter, Rachel. But if I heard Adam, I think you said that actually may have contributed one point of growth. So, I wanted to confirm that.

And then on embedded HCM, it does seem like a pretty big opportunity, is this something that would support kind of the same 20%? Or could this actually help even maybe potentially accelerate or have growth drift a little higher? And then I have a follow-up.

Adam Ante -- Chief Financial Officer

I think longer term, it has an opportunity to really continue to expand our ability to grow at a higher level. I mean, I think it's early, of course, and we want to hit that 20% sustainable in the near term, but we think that has an opportunity to really continue to accelerate. Again, there's a lot of market opportunity. And like we talk about like half of the entire market is really service by these in-house and regional providers.

A lot of those are the software providers that we're working with and that we think that are really a great opportunity to partner with. In terms of the contribution, yes, it was about one point of employee growth, and that's going to come on at a slightly lower PEPM, but it did already add about one point of employee growth in the quarter.

Terrell Tillman -- Truist Securities -- Analyst

That's great to hear. And then just a follow-up question relates to sales and marketing. It was actually a little lower than what we were forecasting and just kind of the trends year over year and sequentially, it's definitely slower. So, I'm curious like I think, Raul, you did say something about productivity of the sales team.

Any more color you could share there? And also, just what about seller retention -- how is that trending? Or was there something else with maybe just certain kind of discretionary marketing that we just didn't see? Thank you.

Raul Villar -- Chief Executive Officer

So, as far as the overall seller cohorts and productivity, they're operating, you know, consistently with our expectations, and retention has been consistent year over year. So, we haven't seen any changes there. Obviously, our objective always is to continue to increase productivity per rep. While you're adding a big cohort of new people, it's always favorable to make sure that you can at least maintain the productivity you had the prior year while adding less productive people into the ecosystem.

So, we feel good about that. Obviously, we have ramp train and grow the productivity of that cohort year over year, and that's what we're focused on execution from that perspective.

Adam Ante -- Chief Financial Officer

Yeah. I think, Terrell, on the full year, we're still going to -- we're planning to be in that 32% to 34% of revenue range which will continue to grow at a good rate. I mean, I think there are some dynamics inside of the quarter as well. We moved some of our -- a couple of larger programs between Q4 and Q1.

So, there might have been a couple of points just back and forth between that. No real difference in the trends, especially as we think about overall sales panel and marketing programs that we've continued to invest fairly similarly although we do expect to continue to get more scale out of the organization as we are really focused on hiring reps and our sales leaders.

Terrell Tillman -- Truist Securities -- Analyst

All right. Thank you all.

Adam Ante -- Chief Financial Officer

Thank you.

Raul Villar -- Chief Executive Officer

Thanks, Terrell.

Operator

Thank you. Our next question is from Bryan Bergin with TD Cowen. Please go ahead.

Unknown speaker -- TD Cowen -- Analyst

Hi. This is actually Jared on for Bryan. In terms of the demand environment, we heard your commentary about it being solid, but would you say there's been any change relative to last quarter? And then how would you characterize the current demand environment relative to pre-pandemic?

Raul Villar -- Chief Executive Officer

Yeah. We haven't seen any changes. It's been really consistent with what I said we're seeing really on top-of-the-funnel performance, strong impressions, visitors to paycor.com, first-time appointments, and win rates are consistent. So, really good about where we are at the top of the funnel.

And so, the demand environment is strong and holding up.

Unknown speaker -- TD Cowen -- Analyst

OK. Great. And then in terms of generative AI, can you discuss the level of client interest in your Gen AI functionality? And how we should think about the potential revenue opportunity there?

Adam Ante -- Chief Financial Officer

Yeah. I think that it's still a little early to call the revenue opportunities on generative AI. I think there's a couple of areas that we're using it in the system like job description generator, for example, we were able to roll out pretty quickly. And we've seen a lot of interest rapid usage, but it's not something that we're necessarily thinking about charging explicitly for.

I mean, we're using those underlying GPT models and Azure, through Azure, and we're seeing a lot of success. We can roll stuff out really quickly. I think there's other areas, though, like with our recent analytics capabilities that we're going to -- where we are seeing strong request from a customer perspective, and there will be some opportunity to potentially charge increase PEPM for that. So, I think it's going to be a blend.

And I think it's still a little early to call, but I think that that should take shape maybe over the next couple of quarters, and we'll have a little bit better view going into the back half of the year. Thanks, Jared.

Unknown speaker -- TD Cowen -- Analyst

Thank you.

Operator

Thank you. Our next question is from Scott Berg with Needham and Company. Please go ahead.

Scott Berg -- Needham and Company -- Analyst

Hi, everyone. Nice quarter. Raul, I have kind of maybe -- or maybe it's a better question for Adam, but I have kind of an unusual question is, as I look at your income statement, your recurring revenue line item, the growth rate tends to bounce around more than other public vendors in the space and more that I've seen historically. Any reason why that is in a particular quarter over time? I didn't know if there's some different dynamics going on in the business that would be helpful to understand.

But the question I've received from investors more than a few times recently.

Adam Ante -- Chief Financial Officer

Yeah. Hey, Scott, I mean, I think over the last four years, we've really migrated to a PEPM model, the majority of our business on a PEPM model, and we've really driven more consistency in the ongoing growth rates and the recurring growth rates. And it's really been about addition of new business for us. Also, as we've rolled out new services, there may have been some lumpiness and whatnot in the year, over the last couple of years coming in.

But nothing particular, and I can't speak to everybody else's business model per se, but we've been really consistent in our approach over the last four years building to the model that we have now, and we've been able to be fairly consistent with it.

Scott Berg -- Needham and Company -- Analyst

Got it. Helpful. And then from a question perspective. your effective PPA or PEPM charge is kind of trended down from 15% a couple of quarters ago.

It was 6% in the current quarter. How is the cross-sell cadence today maybe versus earlier last year? Is it similar than what you've seen from expansion opportunities or maybe new customers buying the same amount? How should we think about that metric and how it's trended over the last couple of years?

Adam Ante -- Chief Financial Officer

Yeah. The cross-sell contribution to the PEPM growth rate has been really consistent, actually. It tends in that sort of two to three points of additional growth from cross-sell. And this year, we've gone from really what I would say is a more normal rate is in that sort of 8% to 9% range.

This quarter, we're in that 6% -- just over 6% growth range and really driven by the two dynamics of the embedded channel, growing a point and then also our enterprise channel -- or enterprise segment grew a little bit faster. That's customers over 1,000. And so, both of those really accounted for the difference really between that eight to nine points of growth and 6.5 points of growth that we're seeing this quarter. But the cross-sell motion has been really consistent.

If anything, there's, I think, continued opportunity, especially as we've added a lot of great products and expanded the suite over the last couple of years. There continues to be a lot of whitespace there.

Scott Berg -- Needham and Company -- Analyst

Understood. Thank you. Very helpful.

Adam Ante -- Chief Financial Officer

Thanks, Scott.

Operator

Our next question is from the line of Brian Peterson with Raymond James. Please go ahead.

Brian Peterson -- Raymond James -- Analyst

Thanks for taking the question, and congrats on a strong quarter. I wanted to follow up on the embedded opportunity. I just want to understand, how quickly can those relationships ramp, both from a technology perspective and working with a potential partner. And then is there a go-to-market motion? I'm just curious how to think about how and when we should start to see that ramp up.

Adam Ante -- Chief Financial Officer

Yeah. Those relationships take a while. I mean, from the time you initiate the first conversation until you sign a new business or you're building over -- or migrating a portfolio, I mean, it can take well over a year. And that cycle is quite a bit longer, and you're navigating a more bespoke service with the partner itself, right? We want to create great technology and integrations that enable a better experience for their customers.

And it's all about setting that up. It's about setting up the go-to-market capability where we support them, especially early on so that they can get up and running. And then once they board, whether that's through the portfolio or just signing new business, then it has the chance and the ability to ramp rather quickly. But it's a long upfront motion from sale to close.

Raul Villar -- Chief Executive Officer

Yeah, Brian, there's two different types of partners, right? There's partners with an existing portfolio. And they tend to take longer because they may already have a solution, and we have to integrate and ensure that we meet all the feature functionality and needs of the existing platform in the formats that they are accustomed to. Other software partners that don't currently have an HCM solution or a limited HCM solution are easier to onboard, and you start selling new. So, you have to -- it's more of a go-to-market motion every week versus converting a large scale.

There's two different opportunities. We started with the latter with two larger installed bases. And we're -- our go-to-market motion has resources targeting both today.

Brian Peterson -- Raymond James -- Analyst

Understood. Appreciate the color there. And maybe just on the PEPM expanding, we're seeing more this quarter. How do we think about kind of the annual pace of expansion over a long-term basis? Thanks, guys.

Adam Ante -- Chief Financial Officer

Yeah. I think that we're probably in a more normal range. So, in the sort of mid- to upper single digits from that 6% or so. And it's going to spend on how pricing trends over the next couple of years.

We're continuing to see opportunity to expand our pricing through additional services and expanding the suite. So, we're wrapping all that together. And then again, you're going to see a little bit more of this pressure versus where we've been recently with the addition of some of the embedded channel and a little bit more in the upper market of the enterprise segment. But I think that sort of six-plus percent to 6%, 8% range, probably makes sense for us.

Brian Peterson -- Raymond James -- Analyst

Thank you.

Operator

Thank you. Our next question is from the line of Mark Marcon with Baird. Please go ahead.

Mark Marcon -- Baird -- Analyst

Good afternoon, and thanks for taking my questions. I also have claims on the embedded solution. Can you just give us some more examples of the types of software partners that you're partner with? And how does it work in terms of the relationship with the client? The platform is going to be with their brand. And so, I'm wondering how does customer service work? How does pricing work? How does the revenue share work? And how should we think about the margin implications?

Raul Villar -- Chief Executive Officer

Mark, it's Raul. Thanks for the 16 questions. I appreciate it. I'll try to remember them all.

So, I think when you think about it from a targeting prospecting perspective, think about vertical software stacks across many different types of industries that are going to market, and delivering either a ERP or a workforce management tool are two good examples. And what they're really looking for is something sticky and predictable inside the stack. And so, that's what we're offering. And so, a lot of great targets for us are in that, call it, $10 million to $250 million in revenue that are looking to expand PEPM into their base, looking to increase their stickiness.

And so, there's a whole bunch of tech companies that fit that model. Many of feedback that we think are really attractive and excited about this type of opportunity. As far as the combination of who does what, that's configurable by partner. Obviously, the payroll and HCM product is ours, and we're going to integrate it into their application.

But ultimately, who does the implementation and who does the service, that really has an impact on the economics, right? And so, we're flexible based on the partner needs. And that's how you should think. Adam, anything you would add?

Adam Ante -- Chief Financial Officer

Yes. I mean, on the revenue model, it's going to be pretty straightforward in terms of we will build a partner, and the partner will go to market with whatever their own pricing strategy is. So, whether they want to build it into their own pricing or bundle it out separately, there's no revenue share.

Mark Marcon -- Baird -- Analyst

Great. And then as we're moving the market in terms of size of clients, how should we think about the fee gross profit margin exclusive of the float, how should that trend?

Adam Ante -- Chief Financial Officer

I mean, the gross profit margin across many of our segments is fairly consistent, actually. So, what we see is that once you get out of the sort of sub-10 employees, sub-15 employee range, the gross margin tends to be fairly consistent. And then it's really about the sort of services and the amount of products that our customers are buying really will ultimately determine the overall margin of that client because payroll ends up being the majority of where the operating cost goes into supporting the client between tax service and operations and general support management.

Raul Villar -- Chief Executive Officer

Yeah. Mark, I think what's exciting for us is, from the beginning, and you were with us at the IPO, our objective was to continue to shift up market. And our new bookings this quarter the average size is double our current employee base. So, we're significantly outpacing, on average, our pay sizes, moving upmarket.

And so, we're really excited about the progress that the sales team has made, the product team has made and the operations team has made to be able to support that ecosystem.

Mark Marcon -- Baird -- Analyst

Thanks.

Raul Villar -- Chief Executive Officer

Thank you.

Operator

Our next question is from the line of Siti Panigrahi with Mizuho. Please go ahead.

Unknown speaker -- TD Cowen -- Analyst

Hey, this is Phil on for Siti. When you guys look at the workforce levels across your customer base, are there any particular verticals that you're seeing weaker or stronger levels? Any kind of color would be helpful.

Raul Villar -- Chief Executive Officer

Yeah. Phil, obviously, we're a broad solution that serves all industries. However, that being said, in the four industries that we are focused on, I would say, we've seen strength in food and beverage in professional services over the quarter and slight moderation in manufacturing and healthcare. But on the average, it's delivered our expected outcome.

Operator

Thank you. Our next question is from the line of Mark Murphy with JPMorgan. Please go ahead.

Unknown speaker -- TD Cowen -- Analyst

Guys, congrats on the quarter. This is Matt on for Mark Murphy. First question is if you guys have seen any kind of divergences. I know you guys said the demand overall has been steady and solid, but any divergence in terms of segment geography and market or kind of any other dimension? Thanks.

Adam Ante -- Chief Financial Officer

Yeah. I mean, not really. It's been fairly consistent, right? As we've looked at the macro market and you look at broader nonfarm payroll growth, trending down, but still very steady, a little sequential decline. And I think we're seeing similar -- I mean, we're seeing -- it's really similar to that.

And so, consistency over the last couple of quarters haven't seen any divergence really in any of the markets or definitely not inside of the portfolio.

Unknown speaker -- TD Cowen -- Analyst

And then just as a quick follow-up. As you guys are kind of moving into the Tier 1 cities and being pulled upmarket. Any changes in who you're seeing in competition or win rates or anything along those lines?

Raul Villar -- Chief Executive Officer

No, win rates are consistent. And from who we see, we still see ADP, Paylocity, Paycom, would be the three competitors we see the most in the market. ADP either as an incumbent or a competitor. But ultimately, those are the three that hasn't changed.

When we started our journey, they were all national providers in every market. And so, there's no real market differentiation within HCM from that perspective.

Unknown speaker -- TD Cowen -- Analyst

Got it. And the win rates across those three have been relatively stable as well?

Raul Villar -- Chief Executive Officer

Yeah.

Unknown speaker -- TD Cowen -- Analyst

Awesome. Thank you.

Operator

Thank you. Our next question is from Steve Enders with Citi. Please go ahead.

Steve Enders -- Citi -- Analyst

OK. Great. Thanks for taking the questions here. I guess I'll ask another question on the embedded HCM.

But I guess I just want to understand a little bit more on, it seems like really good strength of the back there. But how are you feeling about what's embedded in the outlook for the rest of the year? And then as we think about the margin profile of embedded HCM. How is that maybe different versus the core payroll solution?

Adam Ante -- Chief Financial Officer

Yeah. Hi, Steve. We feel the guidance that we've shared that it includes the future growth of these -- the channel and performance thus far. So, we still feel good, and that's really consistent with how we came into the year.

In terms of the margin and the margin profile will be a little bit stronger because you don't have quite as much on the cost of acquisition side, right? So we don't have to maintain sales distribution, you don't have quite the same level of implementation costs, and you're supporting the partner versus the front-end customers. So, a little bit different model and a little bit better margin. I'd say earlier on, like through this year, you're not going to see any material benefits necessarily in the margin profile as we've invested in the channel. But that will come really '25, '26 will continue to be additive to the margin as we grow the channel over time.

Steve Enders -- Citi -- Analyst

OK. Gotcha. That's helpful. Helpful context there.

And then as you think about the Tier 1 investments that you've been making, and I guess, kind of the geographic footprint today. I guess where are you going to call out the -- kind of any change in the pockets of strength there or any areas that maybe were a little bit softer out there? And just in general, how are you feeling about these Tier 1 investments in the ramp-up there?

Raul Villar -- Chief Executive Officer

Yeah. Tier 1 continues to be the bulk of our investment. It's also the lion share our performance and growth. So, really good about that.

We're seeing really good results from an average deal size, number of employees, above the line average. So, we feel like it's really good. As far as like individual markets, like when we're performing well or poorly it's all about the execution of the team on the field. It's really not -- at this point, we've seen no macro impact in any market that we have.

It's more about -- do we have a great leader, are we fully staffed and are they running the playbook. And if they're doing that, we performed really well. When we are missing one of those things, we won't perform as well as we are in the other markets.

Steve Enders -- Citi -- Analyst

OK. Perfect. Thanks for taking the questions.

Raul Villar -- Chief Executive Officer

Thank you, Steve.

Operator

Thank you. Our next question is from Daniel Jester with BMO Capital Markets. Please go ahead.

Daniel Jester -- BMO Capital Markets -- Analyst

Hey, great. Good evening, everyone. Thanks for taking my question. Maybe we can spend a minute talking about your partnership with Visier and the analytics solution.

I guess maybe can we generalize, is this a type of partnership that you might see more from you in terms of going to sort of best-of-breed solutions and seeing if you can use it to accelerate your product opportunity or is this maybe more of a one-off given the need around analytics today?

Adam Ante -- Chief Financial Officer

I mean, we look at partnership opportunities, just like we look at acquisition opportunities and/or developing the solutions themselves. I mean, I think in this case, we really like the partnership with Visier. And we didn't think we were going to be able to get to what they've built. They've been a great partner.

They knew what they were doing. And we've been able to build something together. I mean, they work with us very well and directly with our product organization to create this solution to be able to take it to market through this channel rapidly. And so, we really appreciate our partnership with them.

I think we would consider other partnerships, but it's not like a change in the strategy necessarily. I don't think you're going to see one direction, one way or the other, more or less.

Raul Villar -- Chief Executive Officer

Yeah. I think it's we identified them as best of breed. It wasn't something we could do right away. Ryan is a great partner.

We really enjoy the relationship and we're developing stuff together, which is creating more power for both of our platform. So, we're excited about it, and we want to continue to grow our relationship with them.

Daniel Jester -- BMO Capital Markets -- Analyst

Great. That's really helpful. Thank you. And then I think you touched on this earlier, but maybe we can just circle back to it.

In terms of the percent of your revenue base today that's still being paid on a per-check basis as opposed to PEPM, kind of where does that roughly sit today? Thank you very much.

Adam Ante -- Chief Financial Officer

Yes. We have about a quarter of our portfolio that has some form of a per channel although half of that revenue they're also buying other HCM solutions that are on PEPM model. And this is really over the last five years, migrated from 20% or less than 20% to nearly 80% of the portfolio is now on a on some PEPM strategy. And also 100% of the new business that we sell comes on a PEPM strategy.

Raul Villar -- Chief Executive Officer

Yeah. And I would just like to interject that 99% plus of our payrolls are already perfect. And so, we have -- we don't really have an issue with trying to generate revenue from client mistakes.

Daniel Jester -- BMO Capital Markets -- Analyst

Thank you.

Operator

Our next question is from the line of Matt Pfau with William Blair. Please go ahead.

Matt Pfau -- William Blair -- Analyst

Yeah. Hey, great. Just wanted to ask on the customer list acquisition that you made a few quarters ago. Just an update on how that's progressing relative to your expectations in terms of converting those customers.

Adam Ante -- Chief Financial Officer

Yeah. Hey, Matt, things are progressing really well. We had a really great success with that portfolio and bringing it over pretty quickly. It's all really coming together here in the first quarter.

So, really nothing to add necessarily in the quarter, but on track for the expectations that we have sort of going into the year on that portfolio.

Matt Pfau -- William Blair -- Analyst

Great. And then just a follow-up on the employee retention credit. I think you had a small amount of revenue from that previously -- it's pause now. Is there anything in guidance going forward included from that?

Adam Ante -- Chief Financial Officer

Yeah. I mean, the program hasn't been pause in that it's not still processing and the IRS still is processing. I mean, we had expectations to receive a little bit of ERC-related revenues. And I think it's going to come in close to our expectations.

I mean, we're anticipating something around one point of our revenue for the whole year related to ERC, and I think it's going to be relatively consistent to that.

Raul Villar -- Chief Executive Officer

And Q1 was on track.

Adam Ante -- Chief Financial Officer

Q1 was on track, yes.

Matt Pfau -- William Blair -- Analyst

Perfect. Thank you. Appreciate it.

Operator

Thank you. Our next question is from Kevin McVeigh with UBS. Please go ahead.

Kevin McVeigh -- UBS -- Analyst

Thank you so much. I wonder, can you give us a sense of how much pricing overall contributed to 2023 revenue? And how should we think about that in terms of what's embedded into '24?

Adam Ante -- Chief Financial Officer

Yeah. Hey, Kevin, you're a little top there. I think the question was around price, how much did pricing impact FY '23, yes, I mean, normally -- and the way that we sort of think of it is how much of our PEPM growth comes from pricing actions, and about a third of it tends to come from pricing. And so, that could be two to three points or so depending on the overall growth.

And then we have some specific programs and some new services that we released also in Q3 of last year that we talked about that added up to that 15% PEPM growth was a little bit more outsized there with some new services that were primarily around year-end fee services. So, traditionally or typically, we would see about a third of that growth related to some sort of pricing.

Kevin McVeigh -- UBS -- Analyst

Then if you think about kind of the realization versus kind of the book on the PEPM. You see that narrowing on the quoted $17 or something like that realization versus 51 kind of book, if you would. Any thoughts as to the convergence there?

Adam Ante -- Chief Financial Officer

I think it's going to take time for it to converge all the way to the top end. I mean, I think the fact is, is we're growing our product suite faster than our ability to drive 100% penetration and attach. And so, it's going to take some time. I mean, you're growing the suite out and expanding really the bundle pricing model, which helps us at the point of sale on new business, which is part of what's helping drive up the continued growth.

And then you got to go back and drive the cross-sell motion into the base. And that just takes a little bit longer. And then the team has been great at being able to add new solutions and products to the suite at an outsized rate relative to the rest of the competitive set and the other solutions in the market. So, I don't think it's going to converge in any near term.

And I think it's going to be steady over time.

Operator

Thank you. Our next question is from the line of Robert Simmons with D.A. Davidson. Please go ahead.

Robert Simmons -- D.A. Davidson -- Analyst

Hey, thanks for taking the question. So, your guidance looks like it implies recurring revenue accelerate something like two points in the second half of the year from first half. I guess, how much is that from those maintain partnerships in the embedded solution, and how much other factors? Why would it is slower than the second half?

Adam Ante -- Chief Financial Officer

I mean, it was really -- as we were adding some of these partnerships last year and coming into the year, we really talked about -- and there was a couple of dynamics that led to a lower Q4, Q1 number and going into the back half of what is now FY '24. And yes, some of that's going to be the enterprise. Some of that is going to be the partnerships. And then there's also a little bit of continued same-store sales that we're not going to have the same headwind going into the back half of the year as well.

So, most of it is just the visibility to what we're going to see here coming up in January and starting in our fiscal Q3, which is the January quarter and give us the confidence to the full year, which has been consistent with how we thought about it the last couple of quarters now.

Robert Simmons -- D.A. Davidson -- Analyst

Got it. And then last year, your seasonality was a little bit skewed 3Q, 4Q. Should we expect that to normalize this year, which would kind of suggest maybe a lower 3Q growth rate and a higher 4Q growth rate? Or what should we think?

Adam Ante -- Chief Financial Officer

Yeah. I think you're going to see 3Q normalize just a little bit. There was a little bit of trade with ERC between 3Q and 4Q. It's really not going to be as much of a factor as I think we'll continue to see 3Q normalize over time just as the year-end fees become a smaller and smaller portion of our portfolio.

Robert Simmons -- D.A. Davidson -- Analyst

Got it. Thank you.

Operator

Thank you. As there are no further questions, I would now hand the conference over to Raul Villar Jr. for his closing comments.

Raul Villar -- Chief Executive Officer

Thank you again for joining us tonight. We are encouraged by the underlying fundamentals of the business and remain focused on executing our strategy. We look forward to connecting with several upcoming events, including the TD Cowen HCM Summit. Have a great night, everyone.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Rachel White -- Vice President, Investor Relations

Raul Villar -- Chief Executive Officer

Adam Ante -- Chief Financial Officer

Kevin Kumar -- Goldman Sachs -- Analyst

Bhavin Shah -- Deutsche Bank -- Analyst

Terrell Tillman -- Truist Securities -- Analyst

Unknown speaker -- TD Cowen -- Analyst

Scott Berg -- Needham and Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

Mark Marcon -- Baird -- Analyst

Steve Enders -- Citi -- Analyst

Daniel Jester -- BMO Capital Markets -- Analyst

Matt Pfau -- William Blair -- Analyst

Kevin McVeigh -- UBS -- Analyst

Robert Simmons -- D.A. Davidson -- Analyst

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