Paycor HCM Reports Strong Q4 FY2024 Results with 18% Revenue Growth

Earnings call: Paycor achieves 18% revenue growth in Q4 FY2024 By Investing.com

Paycor HCM , Inc. (NASDAQ: NASDAQ:PYCR) has reported an 18% increase in revenue for the fourth quarter of fiscal year 2024, reaching $165 million, and a 19% rise for the full fiscal year, totaling $655 million. This growth is attributed to the company's strategic initiatives and product enhancements, leading to a larger customer base and higher earnings per employee per month. Paycor's focus on expanding its sales team and partnerships, along with the development of new capabilities on their human capital management (HCM) platform, has contributed to this performance. The company projects revenues of $722 million to $729 million for fiscal year 2025, with adjusted operating income expected to be between $123 million and $126 million. Paycor's strategic growth initiatives have proven effective, with the company reporting an increase in the average number of employees on their platform and PEPM. The expansion of the sales team and increased sales coverage, along with the development of partnerships, have contributed to an increase in average customer size and deal size. The company's investment in R&D has remained steady, and its financial position is robust, with $118 million in cash and no debt. Paycor's optimism about its opportunity in the HCM market is evident in its plans to continue expanding its product portfolio and cross-selling efforts. With a focus on enhancing its core platform, deepening talent solutions, and making the platform more open, Paycor is poised for future growth and margin expansion. Paycor HCM, Inc. (NASDAQ: PYCR) has delivered robust fiscal performance, and the outlook remains positive with revenue projected to grow in the coming year. To further understand the company's financial health and market potential, let's delve into some key metrics and insights from InvestingPro. It's worth noting that Paycor trades at a high EBITDA valuation multiple and has experienced a substantial stock price decline over the last six months. Yet, with its strong cash position and expected net income growth, the company appears to be in a solid position to weather market fluctuations and capitalize on its strategic initiatives. For more detailed analysis and additional InvestingPro Tips, investors can visit the InvestingPro platform, which offers a comprehensive list of 7 tips for Paycor HCM, Inc. These insights can help investors make more informed decisions by providing a deeper understanding of the company's financial health and market potential. Operator: Greetings, and welcome to the Paycor Fourth Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Rachel White, Vice President of Investor Relations. Thank you, Rachel. You may begin. Rachel White: Good afternoon, and welcome to Paycor's earnings call for the fourth quarter and fiscal year 2024, which ended on June 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 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. 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 Jr.: Thank you, Rachel, and thank you all for joining us to discuss Paycor's fourth quarter and full year results. Our unique value proposition of empowering leaders to drive people and business performance continues to win in the market and helped drive revenue growth of 18% for the quarter. For the fiscal year, our team executed against our strategic growth initiatives, increasing the average number of employees on our platform by 9% and expanding the amount we earn per employee per month or PEPM by 6%, resulting in 19% revenue growth. We delivered significant adjusted operating income and free cash flow margin expansion this fiscal year while strategically investing in our platform and customer experience. Demand remains healthy as most employers are struggling with antiquated and incomplete HCM tools. Top of funnel metrics including leads and first time sales appointments increased significantly year-over-year, and our win rates remained elevated as our value proposition resonates in the market. We continue to focus marketing investments in sales hiring in the 50 largest cities in America, where we see the most opportunity. Our sales team grew 9% this year to 600 sales professionals, which increased our sales coverage in the 50 largest U.S. cities from 52% to 55%. Average tenure which drive seller productivity, increased 20% among our field sellers. A core component of our go-to-market strategy is developing and maintaining partnerships with key centers of influence. Benefit brokers help us identify employers that are dissatisfied with their legacy HCM tools and influence nearly half of our field bookings this year. Our mid market product, client experience and sales investments over the last few years continued to pay off as our average customer size and average deal size expanded for the third consecutive year. Since the IPO, the average size of our new mid-market customers increased 30%, helping to grow our average deal size by 55%. We are efficiently extending our distribution via the indirect embedded channel we announced earlier this fiscal year. Our strategic partners enhance their revenue per client and customer retention by offering a modern embedded HCM solution to their clients and prospects. In this past quarter, we continued converting our third partners portfolio and the three new partners we announced last quarter began selling. We also signed several new partners this quarter, tripling our indirect partners over the last year. Our team also continued expanding our award-winning HCM platform with valuable new capabilities for our customers. Our product investment remains focused on deepening our core platform, further enriching our talent solution and enhancing the connectivity of our platform. This year, we released technology that empowers leaders such as Pay benchmarking, Paycor Pass and labor forecasting and increase the value of our suite by $8 to $53. Within our core platform, we recently launched a new compensation management solution that streamlines budgeting and pay cycles and adds another $2 to our suite. Our collaborative tools foster alignment across teams, helping leaders ensure equitable and competitive compensation within budget while driving employee engagement. Revenue from our robust talent suite increased nearly 40% again this fiscal year, validating our unique value proposition of empowering leaders to coach, optimize and retain top talent to drive business results. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. We also significantly advanced our interoperability strategy this year. According to Finch, half of HR professionals leveraged 7 or more employment systems, and most of these applications are not integrated, leading to errors and inefficiencies. API use on our platform increased approximately 300% this fiscal year, demonstrating growing demand to extend HCM software to other business applications. We provide customers unrivaled flexibility to seamlessly connect their data and systems, enabling leaders to automate time-consuming, error-prone manual tasks. We have 300-plus prebuilt integrations in our marketplace and made it easier to create custom integrations by increasing the number of API endpoints and our developer portal by more than 40% this fiscal year. The innovative developments we've made in our HCM platform continue to garner industry recognition. In May, Paycor won five Titan Business awards spanning HR, analytics, workforce management and talent. These tools empower leaders to connect and automate their back office, freeing them up to focus on what matters, building winning teams and driving business results. As we enter fiscal '25, we reflected on our strategy execution progress since the IPO. Over the last 3 years, we have grown revenue by over 85%, increased in adjusted operating income by over 130% and generated nearly $50 million more in free cash flow while expanding our sales capacity by greater than 60% and advancing our industry-leading HCM platform, growing our list PEPM by more than 50%. We have made tremendous progress and the opportunity before us is significant. On our path to $1 billion in revenue, we remain confident in our ability to deliver attractive growth while accelerating margin expansion. We believe there is a long runway to drive durable growth given the size of our market opportunity and the ongoing success we have had displacing legacy solutions which represents 75% of our bookings. Our go-to-market motion has strong momentum as we are staffed to deliver our fiscal '25 targets and encouraged by how sales tenure and retention are trending. We have significant room to drive leverage as we scale, and our top priorities are to drive sales efficiency and accelerate cash conversion. As such, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We will do that while continuing to invest in our strategic growth initiatives namely adding employees through sales expansion and increasing PEPM through product innovation. This progress wouldn't have been made possible without the efforts of our dedicated associates. I'd like to thank the team for their hard work and support in delivering these strong results. Now I'll turn the call over to Adam to discuss our financial results and guidance. Adam Ante: Thanks, Raul. I'll discuss our fourth quarter and full year financial performance and then share our outlook for the first quarter and next fiscal year. As a reminder, my comments related to the financial measures are on a non-GAAP basis. We had another solid quarter, delivering total revenues of $165 million, an increase of 18% year-over-year. Recurring revenue grew 17% over the prior year. For the fiscal year, total revenues were $655 million, increasing 19% year-over-year. Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. This quarter, employees grew 8% over the prior year, driven by new business wins with a modest contribution from labor market growth. Net revenue retention was 98% this year, in line with our expectations as the labor market growth moderated. In a typical macro environment, labor market growth contributes a point or two of our revenue growth. While the U.S. labor market growth moderated over the last 24 months from historical highs of 3 to 4 points of revenue contribution, now closer to 0, it has remained slightly positive. We finished this quarter with approximately 30,500 customers, utilizing our platform to help coach, optimize and retain nearly 2.7 million employees. We continue to see our average customer size and average deal size increase as we continue to move upmarket, demonstrating the success of our product and service investments. Similar to last year, mid market customers represented 80% of our portfolio, with enterprise contributing 15% and the micro segment of under 10 employees contributing just 5% of revenue. Effective PEPM increased 8% year-over-year to nearly $19 this quarter. Excluding embedded HCM deals, effective PEPM increased 10%, fueled by expansion of our product suite. The growth in effective PEPM is attributable to cross sales, pricing initiatives and higher bundle attach rates, and talent has consistently demonstrated strong attach rates and cross-selling traction. Our Embedded HCM channel continued to ramp and contributed 2 points of employee growth again this quarter. We have increasing demand from partners and our pipeline grew sequentially for the fourth consecutive quarter. Although we are pleased with the progress and expect to at least double our embedded revenue in fiscal '25, it will take some time before it materially impacts our revenue. We continue to invest to scale and capitalize on this opportunity by expanding our capacity, our offering and sales enablement tools to drive mutual success. This quarter, we generated $14 million of interest income on average client funds of approximately $1.2 billion, an effective rate up 490 basis points. In addition to achieving consistent top line growth, we have continuously expanded operating margins on an annual basis. Adjusted gross profit margin, excluding depreciation and amortization, was 79% for the quarter and year. This quarter, it decreased by 40 basis points over the prior year due to macro headwinds, however, expanded by 40 basis points for the full year. This quarter, sales and marketing expense was $51 million or 31% of revenue, down nearly 300 basis points from a year ago, largely driven by more moderated sales headcount growth and our focus on efficiency and scale. For the year, sales and marketing expense was $198 million or 30.2% of revenue, an improvement of 160 basis points year-over-year. On a gross basis, we invested $25 million or 15% of revenue in R&D this quarter to continue differentiating our HCM suite and expanding our PEPM opportunity. We all invested 15% of revenue in R&D for the year. similar to prior years and in line with our long-term targets. As we scale the business, we have consistently driven leverage in G&A. G&A expense was $20 million or 12.1% of revenue this quarter, an improvement of 280 basis points from last year. On the full year, we achieved 150 basis points of leverage from G&A. Quarterly adjusted operating income increased over 60% to $25 million with margins of 15.2%, up 420 basis points from 11% last year. For the full year, adjusted operating income rose 36% to $112 million, up 215 basis points while differentiating our service and solution. During the quarter, we generated $37 million of adjusted free cash flow at 23% margin, up nearly 9 points. For the full year, we generated $40 million or 6% margin, an improvement of 430 basis points. Free cash flow margins expanded at twice the rate of adjusted operating income margins as we scale the business and continue to focus on efficiency. We ended the year with $118 million in cash and no debt. In addition, our stock-based compensation expense decreased year-over-year to less than 10% of revenue with less than 1% share dilution. Entering fiscal '25, our top priorities are to drive sales efficiency and accelerate cash conversion. While growth remains our top priority, we believe a more balanced approach to profitability will maximize shareholder value. As Raul mentioned, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We plan to achieve this by balancing sales headcount growth with sales productivity to improve go-to-market efficiency and continuing to drive leverage in G&A as we scale. Similar to the dynamics this year, we expect adjusted free cash flow margins to continue expanding at roughly twice the pace of adjusted operating income margins. Our outlook for fiscal '25 remains positive based on a healthy demand environment and opportunity to drive continued PEPM expansion. However, our guidance does reflect a fluid macro backdrop, including labor market headwinds and a declining rate environment and, of course, some conservatism at this point in the year. For the first quarter, we expect total revenues of between $161 million and $163 million or 14% growth at the high end of the range, which includes $12 million of interest income on average client funds balances of just over $1 billion. And adjusted operating income is expected to be between $17.5 million and $18.5 million. For the full year, we expect total revenues of $722 million to $729 million or 11% growth at the top end of the range. including $48 million to $50 million of interest income, which contemplates up to 200 basis points of rate cuts over the next fiscal year. And we expect adjusted operating income of $123 million to $126 million. On a recurring basis, that implies more than 100 basis points improvement in adjusted operating income margins. In summary, we remain optimistic about our opportunity in HCM. Demand remains healthy for our innovative HCM solution that empowers leaders to unlock the potential of their people and business performance. Our solution is mission-critical to attracting, paying and retaining great talent. We are confident in our strategy and focused on executing a proven go-to-market playbook to deliver greater sales efficiency and free cash flow margins. With that, we will open the call for questions. Operator? Operator: [Operator Instructions] Thank you. Our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question. Terry Tillman: Yes. Hey, there Raul, Adam and Rachel. Hopefully, you can hear me okay. I had a question and a follow-up per instructions. The first question is just on maybe, Raul, kind of ending the year looking for a strong finish in bookings, how did -- what's the report card on the enterprise segment, which you've been excited about those 1,000 plus employee businesses? And then mid market, what was the bookings like versus your expectations? And the second part of that first question is I heard something about conservatism. Are you assuming kind of a slower kind of close rates? Or what are you assuming around bookings activity in both of those key segments? And then I had a follow-up for Adam. Raul Villar Jr.: Yes, the bookings -- thanks, Terry. The bookings for the quarter were really consistent, and we are well-positioned to deliver our FY '25 guidance, and we feel good about the trajectory of the organization. Terry Tillman: Okay. And then maybe just a follow-up, it's interesting in terms of the -- a bunch of commentary on free cash flow progression, an acceleration and then that 20% target. Adam, I was hoping maybe we could unpack a little bit more just any guardrails in terms of duration, the size of the business to get to that target? And is there anything more notable on G&A or sales and marketing leverage to get there as well? Just a little bit more hopefully to unpack on when you get to that, what that would look like in terms of some of those dynamics? Thank you. Adam Ante: Yes. Hey, Terry. Yes. I mean no explicit time frame other than sort of medium to long-term as we think about our continued progression. There's not going to be any sort of structural pops that are going to get us to 20%. I think it's going to be continued expansion. And this year, clearly, it looks like we're on that sort of inflection point as you think about continuing to expand and driving faster free cash flow conversion. So I think that trajectory makes sense for us. And in terms of like getting there, I think you're going to see it, of course, across the board, there's still opportunity across G&A over time, we think that there's some further opportunity across R&D and gross margin. But I think the majority we're going to see the real difference is going to come out of the cost of acquisition. So between our implementation and our go-to-market teams, it's really around leveraging investment. And we're starting to drive some of that efficiency now. So you're seeing some of that show up. But we have probably 8 to 10 plus more points to go over the next couple of years that I think will be a big contributor to free cash flow margins. Operator: Thank you. Our next question comes from the line of Gabriela Borges with Goldman Sachs (NYSE:GS). Please proceed with your question. Gabriela Borges: Hi, good afternoon. Thank you. I'll ask Terry's question on the long-term free cash flow margins in a slightly different way. Raul and Adam, we've spoken before about your conviction in Paycor being a 20% plus growth company. Do you aim for being a rule of 40 company when delivering 20% plus free fair cash flow margin? Meaning, how do you think about the long-term normalized profile of revenue growth given some of the changes in the sales and marketing and some of the newer options like embedded finance that you've talked about in the last couple of quarters? Adam Ante: Yes. Hey, Gabriela, yes, we feel still really good about the opportunity. I mean the market, it continues to be huge. We see a huge opportunity. We're well-positioned in the product we see some sluggishness right now in the macro that is going to make that harder, clearly didn't achieve the target here in this last year. But we've been actually really consistent and close to the 20% growth over the last couple of years on a recurring basis. So it's still our long-term target. And I do think that -- we think that it requires some labor market growth. It's going to require a little bit stronger macro than where we are. But nothing structurally is in the way from us continuing to grow and achieve that to your point, sort of the rule of 40 on both the revenue and free cash flow target. So I think we're going to balance that in. We are going to lean into the productivity right now. We'll make sure we're set up from a sales perspective, and we feel good about that setup into '25. And as we think about long term, we are not coming off of what we see in the market opportunity. And again, our product is so well-positioned right now. We feel really good about that over the long-term. Gabriela Borges: That makes sense. And I'll ask a follow-up on the near-term. Talk to us a little bit about how you're feeling about your ability to retrain, train and enable the salespeople. You mentioned that bookings have come in nicely towards the end of the year. So give us a status update on how the churn and the sales growth is trending in how many sales counts ads do you expect? Or how much do you expect to grow sales count capacity in fiscal year '25? Thanks. Raul Villar Jr.: Yes. Thanks, Gabriela. I think in Q4, retention improved, and we feel that the territory redesign was well executed and well received. And we are looking at our sales capacity, and we feel like we have plenty of capacity to achieve our FY '25 targets. And obviously, to Adam's earlier point, we'll balance in more sales hiring as the macro gets better, but we feel well-positioned today, both from a tenure perspective and a capacity perspective to achieve our targets. Operator: Thank you. Our next question comes from the line of Siti Panigrahi with Mizuho. Please proceed with your question. Siti Panigrahi: Hi. Thanks for taking my questions. Very good execution in this tough market. So Raul, my question is, when you -- I understand the sluggishness you talked about maybe that's impacting the new logo acquisition. But what are you seeing in terms of customer and cross-selling your new products to the customer base I know you have been expanding the product footprint and efficiently additive in compensation. How should we think about the effective PEPM growth this year? What's the adjunction in your guidance? Adam Ante: Yes. Hey, Siti, I mean, what we saw in Q4 was actually some slight acceleration, which was actually a little bit overweighted from some of the cross-sell opportunities. So we saw a little bit more success here in Q4. And I think as we go forward, we are really expecting to see a little bit less PEPM growth, a little bit less PEPM expansion as we add more in the enterprise space as we add more in these embedded partners. We're going to see the PEPM slowdown and really lever into the employee growth. But I think actually, in this quarter and maybe in the near-term, you might see a little bit more of that balance in the PEPM expansion as we've seen some success on the cross-sell side, pick up even a little bit further. So we're seeing good attach rates, good success like we called out earlier on the talent and that progresses or that continues. Siti Panigrahi: Yes. And then a follow-up to that embedded HCM. I know it's been a few quarters since you launched. So how is the progress so far? And what kind of traction are you seeing among your partner base and even through their customer? Adam Ante: Yes. So the traction has been really strong. I mean we announced it in Q1, we've seen continued growth in the pipeline each quarter. We've tripled the number of partners that we've added this year. We continue to go through the migration of some of our larger partners well. And so it's becoming a -- it's really gaining traction. It's still a relatively small portion of the overall portfolio, 0.5 -- less than 0.5 point of the revenue here in '24. We think we'll double that into 25 million but there's a lot more room to grow and continue to overall meaningfully impact our revenue over the long-term. So we're still really optimistic about this channel and its long-term potential. Operator: Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question. Samad Samana: Hi good evening. Thanks for taking my question. Maybe first, just as a follow-up on the embedded side to Siti's question. On your comment that you expect embedded revenue to double in fiscal '25 and you're kind of, no pun intended, embedding that in your guidance. How should we think about that between you adding additional ISVs that will embed the software versus growth of the existing partners that you've already inked and what you foresee in terms of their ramp? And can you just remind us how those contracts work? Are there any guaranteed minimums? Just anything that helps us kind of get a view on the visibility that you have there? Adam Ante: Yes. Hey, Samad, We wouldn't include new partnerships that we haven't signed necessarily inside of our guidance. So all of the revenue is really going to be -- and the expectation is going to be from partners that already exist. And those partners, of course, include their existing portfolios and new business that they're signing as we think about what's reasonable is what we would include in our guidance going into '25. In terms of the structure of those deals, there are some that have minimums for sure. We try to balance those in as -- depending on sort of the size and the need of the portfolios and how much needs to come over and how much work we need to do to necessitate it but we do have structures that may include some minimums. Most of it is really based on more of the usage and how much business our partners are adding to the platform now. Samad Samana: Understood. And then Raul, maybe just a question for you. In terms of upmarket success, you guys continue to call that out. It's been increasing in the mix. And I know you've talked about some changes in the sales organization. How should we think about how the sales organization's composition looks today and how well it's kind of prepared to attack that larger customer opportunity? And as you think about fiscal '25, is there a different type of reps that you're gaming to hire? Or is there a different type of training program to target those larger, more sophisticated customers? Raul Villar Jr.: Yes. Samad, thanks. From a training perspective, obviously, we continually enhance our training to meet the different needs of the different segments that we have. So we are continuing to do that. And the way to think about it's a third of our organization is pointed at that 500-plus segment and the 2/3 are pointed below. And we think that's a really good optimal mix for us today. And we are seeing the benefits of our platform really pulling us up market. And now we are pointing really qualified tenured our best of the best Navy Seals type of reps against those opportunities, and so we're seeing success there. Operator: Thank you. Our next question comes from the line of Scott Berg with Needham & Company. Please proceed with your question. Scott Berg: Hi, everyone. nice quarter. And thanks for taking my questions here. Raul, I wanted to see if you can help us reconcile your view on the market versus other competitors, both public and private that talk about maybe a little bit more of a slowing market than you all talked about. You described really healthy sales and pipelines and what you thought was a pretty robust market. But maybe you can help us dissect why your view seems to be at least marginally different than others in the space? Raul Villar Jr.: Yes. I mean when we look at the market and our platform and our position in the market, we just look at the key components of first appointments, deals that are in process, the velocity of the transactions. And when we look at it, we think what, the market pretty strong. And we finished the year with 16% recurring revenue growth. And without headwinds, we would have been close to 20%. And so we still feel like it's a big macro market with 75% plus of the opportunity on what we would consider legacy antiquated incomplete solutions. And we have a great product, modern robust with some great tools that's really attractive. So for us, it's just about execution and continuing to execute, and we see the market really strong and robust. And some of it could be, Scott, the size of Paycor compared to others. But outside of that, we think the market is really big and still in the early innings of transformation. Samad Samana: Understood. Helpful. And then, Adam, in your guidance, you talked about 200 basis points of rate cuts for the year. You view that certainly on the conservative side relative to what we are seeing out there today, which is probably appropriate. But how should we view usage at existing customers? You talked about how that went from a nice tailwind to more of a flat metric year-over-year. But how are you thinking about C-counts in the guidance? Raul Villar Jr.: Yes. Scott, we intentionally didn't include any incremental labor market growth in our guidance. So we're effectively assuming a flat labor market contribution similar to what we saw in '23. So there might be a slight headwind '23 to '24, but there wasn't much contribution in '23, and we're assuming the same thing here into '24 -- excuse me, '24 into '25 now. Thanks, Scott. Operator: Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question. Brian Peterson: Thanks for taking the questions. So the top of funnel comment sounded really encouraging as you close out the year. Did that actually improve? Or was that above your expectations for the fiscal fourth quarter versus what you saw earlier in the year? Any way to unpack that a bit? Raul Villar Jr.: Yes. I mean it's been fairly consistent throughout the year. And so for us, it's been how can we continue to execute against the opportunities. And it was slightly elevated in the fourth quarter, but I would say all in all, pretty consistent throughout the year. Brian Peterson: And any changes to the share owners that you guys are saying, we hit on some of the regional players and some of the legacy players. But anything in terms of the new business you're bringing on, has that mix changed at all over the course of the year? Raul Villar Jr.: I mean it changes slightly, 75% of our bookings are still what we would consider from legacy incumbent in-house, regional ADP, Paychex (NASDAQ:PAYX). It moves around quarter-to-quarter a little bit. And in the quarter, we had a little bit more contribution from ADP and Paychex than previous quarters. Operator: Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question. Jared Levine: Thank you. Can you discuss how gross revenue retention changed during your -- your thoughts were consistent. Were there any underlying changes based on employer size segment or controllable versus uncontrollable churn? Adam Ante: Hey, Jared, yes, no, I mean it's been fairly consistent. It does pop around. You see like a little bit more pressure on the smaller end of the market, for sure. And we have seen a little bit more success in the enterprise space. But overall, I think actually, the labor market growth really impacted it more than anything. So you saw it tick down a couple of points, which again was really all of that labor market slowness that we saw relative to last year. But fairly consistent otherwise and what you would expect given some of the comments around upmarket success in the enterprise and the softness on the smaller end of the space. Jared Levine: Got it. Thank you. And then in terms of ERTC, can you update us if there was any of that revenue in 4Q and then the headwinds that represented? And or any assumed and what the headwind assumed for '25 is? Adam Ante: Yes. It was effectively immaterial in Q4. We anticipated it in the guidance to come out, and so it was immaterial in -- excuse me, in Q4. And we are not including anything in our guidance for ERTC for '25. So it will be about 1.5 point headwind relative to '24, just as that's completely gone excuse me, about 1 point, excuse me, of headwind. Operator: Thank you. Our next question comes from the line of Bhavin Shah with Deutsche Bank (ETR:DBKGn). Please proceed with your question. Bhavin Shah: Thanks for taking my questions. Raul, just one clarification. Kind of you talked about earlier about feeling good about the level of sales capacity is today. And I just want to just clarify that kind of means no new net hires until the macro improves. Is that the right way to read it? Raul Villar Jr.: No, we are fully staffed for FY '25. And we'll continue to add throughout the year. We have a plan to continue to add. But will either increase or decrease that based on market conditions. So we are going to be flexible to make sure that we're investing properly in that area. Adam Ante: Bhavin just to be clear, we are going to increase capacity through both sales hiring and productivity as we're thinking about growing into '25. So we'll continue to grow from where we are today. Bhavin Shah: Perfect. Thanks for the clarification. And kind of circling back on the embedded opportunity, can you just provide a little bit more insight in terms of some of the recent signings or kind of what you have in the pipeline today in terms of like the demographics of these customers? Are they still a profile from what you have already in the platform? Do you have the existing businesses that you can migrate over? Just any other insight would be appreciated. Adam Ante: Yes, for sure. I mean, so we are really excited about some of the new partnerships that we've been able to sign. Some of them are a little bit different in terms of like payroll service bureau style partners, but then some more vertical software specific like ERPs and POS-type fintech companies. So I think that there's some continued success that we are seeing building off of what we've already shared. So I think that you're going to continue to see that vertical-specific workforce management, and softwares within the ERP space as well. So we're excited about those. They're a little bit smaller than -- some of those partners are a little bit smaller than some of the earlier partnerships that we've signed that have quite a few more employees and portfolio sizes. And so I think that will be a balance in as we continue to progress, not all of them are going to have large portfolios. So we'll balance that. And it will probably be a little bit choppy just in terms of the types of partners that we bring in over the next year as we continue to scale this up. But the pipeline itself continues to grow with those similar type partners. Operator: Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question. Mark Marcon: Good afternoon and nice quarter. Wondering if you can talk a little bit more about some of the new modules. I mean, you've obviously had great traction with your applicant tracking solution. I'm wondering how much further you can penetrate the existing client base? And if you can talk a little bit about the newer models that you've come out with in terms of employee compensation and how that ends up fitting in? And then I had some follow-up questions with regards to the inside sales force. Raul Villar Jr.: Yes. Hey, Mark, it's Raul. We have a tremendous amount of white space available to continue to cross-sell. The majority of the PEPM expansion has happened over the last 5 years. And obviously, we have a large client base that we can continue to cross-sell in. And we continue to invest and grow our cross-selling team, and we saw some of that success in our fourth quarter over performance. And so that was nice to see. And we'll continue to do that. Obviously, talent is really significant. It's a broad portfolio, both attraction and retention. And we're continuing to press on the talent solution. From a compensation perspective, giving frontline leaders the ability to equitably provide compensation increases across our teams and an equitable, fair and within budget really just enables a frontline leader to be more effective during that process. And so we think that fits right into our leader, strategy and really helping empower frontline leaders to build winning teams. Mark Marcon: Can you talk a little bit about the size of the internal sales force that's cross-selling into the existing base? And where does that stand relative to the total of 600? And how big could that become? Because it seems -- I mean, particularly on talent, it's a great solution. Raul Villar Jr.: Yes. I mean we're still -- as you know, we're still focused more on new. By and large, the majority of our assets are pointed at hunting new clients. However, about 10% of our organization is focused on cross-selling, and that's been growing year-over-year. And I think you'll continue to see us press in there because there is such a big white space opportunity. Operator: Thank you. Our next question comes from the line of Mark Murphy with JPMorgan (NYSE:JPM). Please proceed with your question. Arti Vula: Hey, this is Arti Vula on for Mark Murphy. Congrats on the quarter and thanks for taking the question. A quick one, just any divergences to call out in terms of demand patterns by customers in terms of geography or end market or any other relevant to mention? Raul Villar Jr.: No, the Demand has been really consistent by size, by market, by industries. We haven't seen any significant changes from that perspective, Arti. Arti Vula: Thanks. And then looking at your slide deck, you have -- you kind of reached sales force coverage among the top 50 metros to about 55%. And then now 52% last year and 44% the year before that. Is there a framework of how we should think about that going forward in FY '25, whether that will accelerate or not? How that fits into the fact that you're kind of fully staffed to deliver on your targets -- FY '25 targets now? Thanks. Raul Villar Jr.: Yes. Arti, we are going to continue to increase coverage throughout the year. I wouldn't expect dramatic coverage enhancement. I would say that we'll continue to add heads. As I said earlier, we're trying to be intentional about headcount acceleration and leveraging the capacity of our existing sales organization. While we continue to add reps in each of those 50 markets where appropriate. So we'll continue to grow, and that number will be higher this time next year. Arti Vula: Great. Thank you. Operator: Thank you. Our next question comes from the line of Steve Enders with Citi. Please proceed with your question. Steve Enders: Great. Thanks for taking the questions here. I guess maybe just following up on the last point of the top 50 sales coverage, and it seems like it's a bit of a shift away from the prior Tier 1 coverage number that you've previously kind of reported on, I guess. What's kind of driving that shift? And I guess what does that maybe signal at how you're thinking about that opportunity there? Raul Villar Jr.: Yes. Steve, how are you? It's Raul. It really isn't a shift or a change in strategy. We've always been focused on the 50. We were extremely barren in the top 15 or the Tier 1, and we've continued to move that percentage up. And as we look at continued ongoing seller growth, we will continue to add in all 50 markets over time. It just will be based on opportunity and finding the right person and having the right opportunity available for that person. So I don't think it's a change in strategy. We still love the top 50 cities. We are going to continue to add headcount in all fit markets. And that's what comprises where our 600 sellers sit today. And so we just felt like it was more directional for everyone to understand the top 50 cities and where we sit from that perspective. Steve Enders: Okay. Got you. That's helpful. And then I guess just on the free cash flow side, I mean, pretty -- looks like pretty solid performance here in the quarter. I guess anything to call out that helped kind of add to that performing tier and I guess, anything that seems it pulled forward or maybe there's some like timing shifts in there? But just I guess, what is that kind of indicated as well for fiscal '25 and the free cash flow dimensions there? Adam Ante: Yes. I mean, clearly, on the quarters, there's quite a bit of net working capital changes. So like within the year, it's a little bit harder to look at, but we're trying to manage this to the full year. So I think that dynamic of the expansion on the full year is really important. But to smooth out those net working capital items over time. The primary driver of the free cash flow benefit is still the overall expansion and productivity that we're getting out of the cost of acquisition in this case in this year. And we are seeing the same thing out of G&A. So most of it is driven by the operating and within the quarters, you have of those net working capital items. Operator: Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question. Daniel Jester: Great. [Indiscernible] everyone. Thanks for taking my question. Maybe we could spend a moment when you talked about the mix of bookings, 25% come from other solutions which are modern or new. Can you just remind us like why does Paycor win in those circumstances? It's clear relative to the legacies, but relative to the more modern solutions, why are you winning? Raul Villar Jr.: Yes. I mean I think strength of the platform, most open platform, most robust platform and our win rates are up and our share and winning from modern cloud competitors continues to increase and reach a high in FY '24 as a percentage of the mix. So we feel really well-positioned to compete against legacy and especially to compete against modern. It's a really deep platform. We offer the most PEPM, which in theory ties to feature functionality. So ultimately, we have the most robust platform. We have the most modern platform, it's the most open platform, and that's why we're winning. Daniel Jester: Okay. Thank you for that. And then, Adam, maybe I missed this in the prepared remarks. But can you remind us what's going on with gross profit margins? It looks like they were down year-over-year. Is there anything that you'd call out there? Thanks. Raul Villar Jr.: Yes. Hey, Dan. The primary drag in that case was really the form filings just sort of pressure that we saw coming out. We actually saw some really good underlying operating expansion, margin expansion apart from those, and we'll continue to press to that for '25. There's a little bit more margin pressure that we'll see from that high margin form filings revenue that's going to -- the rest of that, that's going to leave here in '25, but we'll work through that this year and be able to show continued expansion. Operator: Thank you. Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet: Hey, good afternoon. Thanks for taking the question. I guess when you look at some of the additional modules and the attach rates you're seeing and some of the momentum behind that, where do you feel like you're looking to put the most behind the R&D budget? And so much as you look at M&A, are there areas of the portfolio that you think are sort of prime to add additional capabilities as you've seen demand for the attachment there? Raul Villar Jr.: Yes. I mean -- hey, Matt. Thanks. It's Raul. I think we think about our R&D investment in three big buckets; continuing to enhance our core platform, obviously, continuing to deepen our talent solutions, which are best-in-class already, and then continuing to make it the most open platform in the category. And those are the 3 areas where we continue to invest in, and we feel really good about it. From an M&A perspective, there's no one area or one gap in the platform that we're looking to fill. I would say there's hundreds, if not thousands of cottage categories that kind of surround the HCM ecosystem that we're always looking to evaluate. And so that's an ongoing process. We're always looking for great solutions that can help our leaders build winning teams. Matthew VanVliet: All right. Very helpful. And then as you look at auto success across software seems to be in verticalizing your offering to make it a little more market-ready, you've talked a lot about embedded solutions and some of your partners, but how might you be able to use AI and maybe specifically GenAI around the talent and training side of it as well as employee engagement to really help broaden the verticalization of your product to be a little more out of the box ready? Adam Ante: Yes. Hey, Matt, I mean, actually, the AI that we're driving now, the majority of where you're seeing it show up is inside the talent solution and inside the talent suite. There's a lot of sentiment capability like the job description generator sort of sort of functionality. So there's a lot of functionality around that, talent attraction and recruiting. And then we'll continue to look for those opportunities -- not just look for those opportunities, but building those opportunities around some of the more sort of proactive nudging, as folks are working through their workflows inside of the system and making those workflows easier to navigate, so that the clients don't have to spend quite as much time inside of there, and they can focus on more of the leader and performance management tasks that are more critical to the organization. And we're looking at some of that in and again sorry, not even just looking at it but working through some of the GenAI type chat functionality that we think are going to be really additive for our customers as well. Matthew VanVliet: Right. Great. Thank you. Operator: Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question. Jake Roberge: Yes. Thanks for taking the questions. I just wanted to follow-up on the embedded strategy. When you look at the pipeline of new partners, are they primarily ones with an existing portfolio? Or are you looking at partners that are more on the sourcing side as well? And then have there been any learnings for that motion now that you've been able to onboard the first few partners throughout this year? Raul Villar Jr.: Yes. Hi, Jake, it's Raul. I think, obviously, the portfolio will be a mix. There are more embedded candidates without portfolios and with portfolios. Obviously, we look for both. And I would say our pipeline is probably 70% with our portfolio, 30% with portfolios. And I think what we are doing is getting that muscle memory today both, hey, existing portfolio companies how much converts and then how much they sell postmortem. And then ultimately, for people without portfolios, how fast can they ramp up their sales engine and how many units they can have. And in the fall at our Investor Day, we're going to give some -- our early learnings, 12 months in of how that looks from a metric perspective, so people can model it. Jake Roberge: Okay. Helpful. And then benefits for brokers, it sounds like those now drive nearly half of the bookings for you. Can you talk about how retention and multiproduct adoption looks like for those types of logos? And is there any concern that channel might be getting too large of a new booking source given you may not fully own the customer relationship? Or would you be happy to see that continue climbing? Raul Villar Jr.: Well, Jake, I love bookings. So I would definitely like more bookings from benefit brokers. No, we don't -- we own the client relationship. They essentially -- it's a mutual relationship where they own the benefit side and we own the client side. But we end up owning the client relationship on the HCM side, just like they own the client relationship on the benefit side. They've been a great partner and we are going to continue to grow. And I think 50% is what we -- it's pretty much a high watermark so far. And as we continue to grow the organization, we don't anticipate it being at 50%, it should be somewhere between 30% and 40% longer term. But in the short-term, Jake, we are going to take every booking dollar we can get from benefit brokers and be happy. Thank you. Jake Roberge: Very helpful. Thank you. Operator: Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question. Kevin McVeigh: Great. It looks like the midpoint at '25is about 10% revenue growth as opposed to 19% in '24. Maybe this is for Adam. Adam, how much of that delta is rate versus kind of the environment as opposed to maybe conservatism or anything else? Is there any way to just dimensionalize in round percentages kind of the components of the deceleration? Adam Ante: Yes. Hey, Kevin. Yes, you're seeing a couple of points from the interest income, right? Interest income is likely to slow down and reverse in terms of total nominal dollars this year. So you're seeing a little bit of pressure from that. And then you're seeing a couple of points from the -- or about 1 point from the form filings change. And then you're seeing some conservatism. I mean just based on where we are at this point in the year, we are trying to be intentional, and we want to get back to the sort of the philosophy that we we've seen, and we are not expecting any contribution from the labor market still. So we are still seeing the broader sort of macro sluggishness and we wanted to be intentional about that heading out to this sort of longest point in our guide curve. Kevin McVeigh: Got it. And just maybe just following up on that. How much of it -- I don't know if you have any impact of pricing in there? Adam Ante: Just in terms of how much pricing we would intend to continue to put in. I mean, I think we're going to see a balance between employee growth and PEPM growth that is likely to persist something sort of similar to what we've been experiencing here in '24. So I think that you're going to see a mix that's probably closer to 50%, 50% or half and half. and that we'll then start to lend itself more to the employee side over time. But I think it's going to be consistent with where we've been for the last couple of years. Kevin McVeigh: Thank you. Operator: Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question. Patrick Walravens: Great. Thank you. Raul, for you first. I want to talk a little bit more about sales productivity. So many of the vendors in sort of the CRM area are talking about applying AI to increased sales efficiency and customer engagement. And then [indiscernible] had an announcement about agent force that you might have seen yesterday. So you guys have 600 reps. Are you actively using any sort of AI technologies to improve sales efficiency today? Is it working? Raul Villar Jr.: Yes. So I would say we are in the early innings. We use it a lot on the front end on the marketing side to create the best optimal demand and we're able to point the prospects that are most likely to purchase from our demand to the sales reps. So I would say that we are in the early innings, but we're pointing the best prospects, most likely to purchase to our sellers. Patrick Walravens: All right. Cool. And then, Adam, for you, forgive me if I missed it. But if total revenue growth is 10% in '25, how do we think about recurring revenue? Adam Ante: Yes. So I mean, we gave a little bit of the breakdown on interest income specifically for the quarter. So we are guiding to about $12 million in the quarter, which implies a couple of points faster growth on recurring for the quarter and then for the full year. So $48 million to $50 million on the full year on interest income, which would put it at again a couple of points faster in terms of our recurring. We broke all that for you. Operator: Thank you. There are no further questions at this time. I'd like to pass the call back over to Raul for any closing remarks. Raul Villar Jr.: Thank you for your continued interest and support. We are optimistic about fiscal 2025 and remain confident in our ability to deliver attractive growth while accelerating margin expansion. We look forward to connecting with you at upcoming events, including the Stifel Tech Executive Summit in Deer Valley; the Goldman Sachs Communacopia and Technology Conference in San Francisco in the HR Tech Conference in Las Vegas. Have a great night, everyone. Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Despegar.com, Corp. (DESP) Q2 2024 Earnings Call Transcript

Luca Pfeifer - Investor Relations Damian Scokin - Chief Executive Officer Sebastian Mackinnon - Chief Partner and Corporate Affairs Manager Gonzalo Estebarena - Chief Technology Officer Amit Singh - Chief Financial Officer Good morning and welcome to Despegar's First Quarter 2024 Earnings Conference Call. My name is Krista and I will be your operator for today's call. At this time, all participants are in a listen-only mode and please note that today's webcast is being recorded. There will be an opportunity for you to ask questions at the end of today's presentation. Now I would like to turn the call over to Mr. Luca Pfeifer, Investor Relations. Luca, please go ahead. Luca Pfeifer Good morning, everyone, and thanks for joining us today. In addition to reporting unaudited financial results in accordance with US generally accepted accounting principles, we will discuss certain non-GAAP financial measures and operating metrics, including foreign exchange neutral calculations. Investors should carefully read the definitions of these measures and metrics included in our press release to ensure that they understand them. Non-GAAP financial measures and operating metrics should not be considered in isolation as substitutes for or superior to GAAP financial measures, and are provided as supplemental information only. Before we begin our prepared remarks, please allow me to remind you that certain statements made during the course of this discussion may constitute forward-looking statements which are based on management's current expectations and beliefs and are subject to a number of risks and uncertainties that could cause actual results to materially differ, including factors that may be beyond the company's control. These include but are not limited to, expectations and assumptions related to the integration and performance of the business -- businesses we acquire. For a description of these risks, please refer to our filings with the US Securities and Exchange Commission and our press release. Speaking on today's call is our CEO, Damian Scokin, who will provide an overview of Despegar's second quarter performance as well as an update on our many strategic growth initiatives. Next, Sebastian Mackinnon, our Chief of Travel Partners will provide you with an update on our B2B efforts, followed by our CTO, Gonzalo Estebarena, who will discuss recent developments of our AI-powered travel assistant, SOFIA. Finally, Amit Singh, our CFO will follow with a more detailed review of the quarter's financial results. After that Damian will end our prepared remarks with a wrap-up before we open the call for questions. Thank you, Luca, and good day, everyone. We are pleased with the performance of the business throughout the second quarter of the year. Our gross bookings grew by 4% year-on-year to $1.3 billion, impacted by much higher than expected foreign exchange headwinds during the quarter. In constant currency, our gross bookings increased by a robust 37% year-over-year, which we believe is industry-leading globally. Our commercial execution throughout the quarter remained solid as we continued focusing on higher-margin package sales. We continue making significant progress on this front with packages as a percentage of the gross bookings expanding 190 basis points year-on-year to 35%. Our strong package sales combined with our focus on profitable growth enable us to achieve a take rate of 13.8% in the quarter. As our product mix continued improving with higher margin non-air revenues accounting for 64% of sales in the quarter. We saw top line growth accelerate to 12% year-on-year despite much higher than expected foreign exchange headwinds. Total revenues grew to $185 million and we accomplished this in the seasonally weak second quarter. Importantly, when adjusting for FX impact, our revenues increased by a robust industry-leading growth rate of 46% year-on-year. Also to note, the second quarter had a significant impact from the severe floodings in Rio Grande do Sul, which resulted in temporary air cancellations in Brazil. Despite our incremental growth investments, particularly in selling and marketing, we deliver adjusted EBITDA of $37 million in the quarter, up by 22% year-over-year. As a reminder, the second quarter of last year's adjusted EBITDA included a one-time benefit of $9.8 million. When adjusting for this benefit, adjusted EBITDA growth in the second quarter of 2024 was 82% year-over-year. Additionally, adjusted net income for the quarter was $30.2 million, our highest quarterly adjusted net income ever, increasing by an impressive 397% year-over-year compared to the adjusted net income of $6.1 million in the second quarter of last year. Turning to our business segments, our B2C bookings during the second quarter reached a total of $1.1 billion. Consumer demand was strongest in Brazil and Mexico, our key market, and was concentrated in higher margin packages and hotel sales. We continue to maintain our competitive edge through our compelling product offerings, strong sourcing, and a market-leading portfolio of payment options which are a key differentiator with regards to Latin American customers as many finance their travel and have limited credit. We are also particularly proud of our new brand partnership with globally recognized artist Shakira. She's the key feature in our exciting new campaign Dream, Choose, Travel. The theme of which is inspiring and connecting people through memorable experiences. This partnership reinforces our brand across the region with a focus on strengthening and extending our leadership within Latin America. To see more details on these, please visit the Despegar website at www.despegar.com. During the quarter, our B2B and white-label business segments remain significant drivers of our growth. Specifically, B2B gross bookings saw remarkable expansion of 43% year-over-year, while our emerging white-label operations grew 7% year over year. In addition to the strong growth trends we have observed over the recent quarters in our B2B segment, we continue focusing on expanding our commercial relationships. We are therefore particularly proud of the results we have recently achieved in the form of three new white-label partnerships and whose onboarding programs are already underway. Later in the call, Sebastian Mackinnon will provide you with more details on the performance of our B2B business, as well as discuss its future growth potential. Next, I would like to discuss how our customer-centric approach provide superior value to our customers. Customer loyalty remains one of our key priorities at Despegar. To that end, we continue to invest in and expand our loyalty program Pasaporte Despegar, in order to drive customer retention and repeat rates. For the quarter, our program grew by 65% year-on-year to 27.9 million members. As a result, approximately 75% of our transactions are now made by program members. Furthermore, an ever-increasing proportion of our customers value Pasaporte loyalty points, as seen in points redemption activity, which continues to grow. During the quarter, redemptions increased by 5.8 percentage points year-on-year, reaching 14.4% of total transactions. The Pasaporte Despegar loyalty program provides significant value to our customers by offering a range of benefits and rewards that enhance their overall experience. Members of our program enjoy exclusive discounts, early access to special promotions, and the ability to earn points on every purchase which can be redeemed for future travel. This not only incentivizes customers to choose Despegar for their travel needs, but also fosters a deep sense of engagement and satisfaction. By rewarding loyalty, we encourage repeat business and build long-term relationships with our customers. Moreover, the program's considerable growth reflects our commitment to continuously improving the customer experience. As the number of Pasaporte Despegar members increases, we gain valuable insight into customer preferences and behaviors, allowing us to better tailor our offerings and provide more personalized services. This enhances user experience by ensuring that each interaction with Despegar is relevant and rewarding, further solidifying our position as a trusted partner in travel. As discussed on previous occasions, innovation lies at the heart of Despegar. We combined our best-in-class technology platform, leading inventory, our regional expertise to provide unmatched value to our air and hotel suppliers while tailoring our offerings to the specific preferences of Latin American customers. A particular focus continues to be our mobile app, which is also a key tool for driving customer loyalty, repeat rates and cross-selling opportunities with downloads increasing 43% year-on-year to $18 million, a new all-time high for Despegar, our app is demonstrating significant growth. Additionally, app transactions now represent around 50% of total transactions, further testifying to the user-friendliness on value our customers attribute to our mobile app. Engagement through our mobile app offers tremendous value to our customers by providing a seamless and convenient search and booking experience. Despegar app is designed to enhance the user experience with intuitive navigation, personalized recommendations, and exclusive offers that cater specifically to the unique needs and preferences of Latin American travelers. This high level of engagement not only fosters loyalty but also encourages customers to explore a widened range of services and products, leading to more cross-selling opportunities and higher average [indiscernible]. By continuously innovating and improving our mobile platform, we ensure that our customers receive the best possible service, which in turn drives higher satisfaction and repeat usage. In addition to enhancing our app, we continue making significant advances with our AI travel assistant, SOFIA. As you will recall, we launched SOFIA back in March to stay at the forefront of travel technology, enrich the customer experience through more tailored and personalized services increase cross-selling opportunities, gain more insights into customer behavior and preferences, rise our operational efficiency as well as strengthen our competitive mode. Later in the call, Gonzalo will discuss the significant increase in user engagement with SOFIA this last quarter, as well as our vision to deploy this technology not only in our B2C offering but also within our B2B solution and after-sales services. Before turning the call over to Sebastian, I would like to briefly discuss a few more significant milestones and developments in the quarter. First, with the objective to streamline our business and focus more on our core operations, we have formed a strategic alliance with World2Meet the travel division of the Iberostar Group, a Spain-based global tourism company. As part of that transaction, World2Meet has acquired our Destination Management Company, or DMC, business, operating under the brand BDExperience. We have also entered into a long-term agreement under which World2Meet will operate as a preferred partner to Despegar for the provision of destination services in the Mexican Riviera and the Dominican Republic. The divestment was effective July 30 and reflects a greater focus on technology and deploying capital where it generates the highest returns for our shareholders. As part of this transaction, almost 600 of our 4600 total employees have transitioned to the new owner of the business. Second, we are pleased to announce that on June 28, Despegar earned inclusion in the Russell stock indexes. The Russell indexes are among the most widely used benchmarks for small-cap stocks. Joining the Russell Stock Indexes is a significant milestone for Despegar as we continue to leverage our top-tier technology platform scale, brand strength, and local expertise to consolidate Latin America's fast-growing travel market. Lastly, in line with our ongoing commitment to enhance our ESG standards, we published our four ESG report on June 20. This report marks the first time we have applied a double materiality approach, incorporating GRI 2021 standards which evaluate the broader impact of our actions on society and the environment, as well as adopting SASB standards which assess how these actions affect our financial performance. These steps underscore our dedication to sustainability and responsible business practices. We have accomplished a great deal in the first half of the year, bolstering our confidence in our ability to continue providing exceptional value to our customers and shareholders and positioning our company for sustained long-term industry-leading growth. We see many opportunities ahead and look forward to continuing updating you on all our achievements. I will now turn the call over to Sebastian, our Chief Travel Partner, to expand on the growing opportunities in our B2B business. Sebastian Mackinnon Thank you, Damian. I'm pleased to be here today. I would like you to provide you with some background information on the Despegar's B2B business, as this is an important context. Our B2B business has gained significant traction over the last three years. Since 2020, we have strategically developed our B2B approach to further monetize our market-leading technology platform and inventory by offering it to other online and offline travel agencies across Latin America and now beyond the region. Currently our inventory includes more than 1.5 million accommodations, 230 airlines as well as packages and more than 7500 activities that are sold through two main avenues. One is by providing our entire travel content with exclusive rates through API connectivity to Online Travel Agencies or OTAs, and to major consolidators. Through these tailored channels, we reach almost 800 travel agencies which generate approximately 50% of our B2B revenue, with clients that include global players such as Expedia, Restel, Hotel [indiscernible] and Sea Trip, among others. Notably, 100% of the revenue from this segment comes from hotel sales. Additionally, we have developed an API for flights set to launch during the second half of this year. This will leverage our sourcing capabilities and drive additionally B2B revenue growth. The remaining 50% of the Despegar B2B revenue is generated through HTML solutions ideal for small and medium-sized travel agencies in Latin America. This one-stop-shop solution offers hotels, flights, and packages along with technological solutions, back-office support, and customer service. In our region's fragmented market, which has few competitors of Despegar scale, our commercial conditions are significantly more favorable than theirs, leading more than 15,000 small and medium offline agencies to purchase through us. This strategy, levered by our best-in-class technological platform, enable us to tap into and consolidate the vast offline travel market within Latin America. Moving forward, we see material growth opportunities in this segment as we recently expanded our HTML service to Argentina, Chile, Ecuador, and Peru. As a result of our adaptable technology and our unique inventory, we have more than triple our B2B business in the last four years, but our ambition goes well beyond that current results. Since 2022, B2B top line growth has been industry-leading, with our B2B gross booking increasing 43% in the second quarter of this year. Given these encouraging results and the opportunity we see to deepen our penetration Latin America's travel market, we believe we can achieve very substantial growth over the near and midterm. In addition to the API and HTML operations of our B2B business, we are particularly excited about our white-label operation. In recent years, the white-label business has experienced significant growth, primarily driven by the ability of the travel offering to foster and strengthen customer loyalty outside the industry. This growth has been amplified by the recovery of the travel industry. Capitalizing on this opportunity, we have quadrupled our white-label gross bookings over the last five years. Despegar white-label solutions enables our partners such as [indiscernible] Libelo, Mastercard, or Liverpool to engage their customers more and keep them within their brand ecosystem, seeking to increase usage of their proprietary payment methods, thereby accumulating or redeeming loyalty points and to enjoy exclusive benefits. Through our leading technology platform, extensive travel products offerings, and exceptional customer experience, our more than 80 partners can significantly enhance the value that their customers attribute to our partners' own loyalty program. A further testament of the quality of the customer's experience and the scalability of our best-in-class technology platform are the high-level partnership we recently signed in Mexico. In this country, we are excited to begin a long-term partnership with a popular global ride-hailing app. As part of this new high-level partnership, we will launch a branded travel platform within this super-app. This will engage millions of the app's customers to search Despegar's extensive travel inventory and book flights, hotels, and travel packages at an affordable price. This new alliance marks our first partnership with a super-app which is rapidly expanding. We also signed another promising high-level agreement with Elektra, Mexico's retail and financing service conglomerate. As you might know, Elektra operates a total of 1,450 points of sales throughout Mexico across its portfolios of brands. As part of this new partnership, we will provide our technology platform and technical expertise to operate the Akis Elektra kiosk, which will be installed in Elektra stores. We are poised to provide our new partners, customers with state-of-the-art travel inventory at competitive price and are looking forward to deepening our partnership with them in the future. Another notable and recent development under our white-label B2B growth strategy is a white-label partnership that we recently forged with Scotiabank in Chile. We are very excited for Scotia to join our growing list of banks and loyalty partners across the region and are convinced that the bank's more than 1 million clients will gain access to exclusive travel experiences through our platform. Through this API integration partnership, Scotiabank can further monetize its customer base and strengthen customer loyalty. Leveraging our unique and extensive inventory of travel products available through our state-of-the-art technology platform. Scotia customer will also have the opportunity to redeem loyalty points. Given the success of past white-labeling partnerships, we expect that our leading technology products will increase customer loyalty for Scotiabank as well as generate additional revenue streams for them. Lastly, as Damian communicated in the past, we continue working to expand the Despegar's reach beyond Latin America. In fact, we are in active discussions with several prospective business partners in new geographies. We are convinced that our flexible technology platform, global inventory, and competitive prices are a compelling value proposition for all our partners and laid the foundations to our international expansion. To conclude my part of today's presentation, we are confident that both our competing B2B and high-level solutions will contribute significantly to Despegar's growth in the coming years, both within Latin America and beyond, positioning Despegar as a global travel technology company. Now over to Gonzalo for an update on our revolutionary AI travel assistant, SOFIA. Gonzalo Estebarena Thank you, Sebastian, and hello, everyone. Before diving into the details of the recent upgrades we made to SOFIA, I am pleased to share with you that customer engagement with our AI assistant continues to rise. During the last quarter, daily conversations increased by 4x, while the share of users who returned to continue using SOFIA after an initial interaction doubled. As we increase SOFIA's knowledge base and enhance her capabilities, responses are becoming more appropriate, enabling SOFIA to address a growing number of customer queries. The growing number of conversations combined with a feedback loop in which we score for needs addressed enables us to continuously refine our AI travel assistant, providing a differentiated service offering to our customers and making SOFIA the travel companion of choice. During the quarter, we introduced several significant enhancements to SOFIA. Today, I would like to discuss four that I believe are the most significant ones. First, we integrated after-sales support into SOFIA's conversational capabilities. SOFIA can now access all previous and current reservations of a traveler and support the customer with information for the most frequent needs, ranging from cancellation questions to web checking data, also including Despegar contextualized frequently asked questions and reservation information. The objective of this specific enhancement is for SOFIA to provide personalized, objective, and human-like answers to adequately address after-sales questions and ultimately resolve customer inquiries without human assistance. The other objective, of course, is to reduce costs related to customer support. Second, in this quarter, we developed new conversational capabilities to steer the conversations through a sales path incorporating more commercial intent. The implementation of this new technology, which mimics what our best human agents do in our assistive channels, has enabled SOFIA to more accurately follow the flow of a natural conversation, with a particular focus on helping travelers narrow down alternatives to provide them with a precise, relevant, and adequate selection of, for example, hotel options. This differentiates SOFIA from typical AI chat solutions, which tend to be good at answering particular questions rather than engaging the customer and creating opportunities to maximize the sale. The goal of our solution is to ultimately enhance conversion rates and cross-selling opportunities. Another important attribute that we refined in this quarter is memory. Our customers can now continue a conversation with SOFIA across multiple devices previously used. This significantly reduces repetitive input on the part of the customer, speeding up travel planning and improving conversion. It also gives SOFIA the ability to present itself as more human-like, since it no longer gives the impression of having forgotten the traveler from a previous conversation. Lastly, we have expanded SOFIA's knowledge base, which now encompasses many areas of Despegar's general knowledge such as travel coupons, our loyalty program, Pasaporte, or for example, payment options. Also, trip planning features such as restaurant recommendations, suggestions on what to do at any given destination, as well as weather trends are currently available through a combination of the ChatGPT language model that powers SOFIA and integrations with Google Maps and Despegar's own content. These enhancements further enrich the customer's booking process, increase engagement with SOFIA, and ultimately provide a fully tailored booking experience. In summary, SOFIA keeps on adding exciting features and customer engagement is improving as a result. Now, moving on from our B2C AI agent. We are also excited to announce our ambitious plans to expand SOFIA's capabilities within our B2B relationships. Our goal is to enable seamless integration of SOFIA into the platforms of our B2B partners, making it an indispensable tool for their operations. We have had promising initial conversations and are thrilled by the interest shown by several partners who are eager to explore an integration of SOFIA into their proprietary systems. This integration will empower them to drive customer engagement and enhance self-service capabilities. By leveraging SOFIA, our partners will streamline their operations, improve user experience, and ultimately achieve greater customer satisfaction. Our commitment to continuous improvement and innovation ensures that SOFIA remains at the forefront of technology, providing unparalleled support and efficiency not only in B2C but also in B2B environments. Now, before turning the call to Amit, I would like to share one last exciting development. Beyond SOFIA's client-facing capabilities, we are also leveraging generative AI to revolutionize our customer service. We are now analyzing 100% of our customer interactions using generative AI, aiming to identify service gaps and optimize our self-serving offerings. This comprehensive analysis allows us to pinpoint areas for improvement and enhance the overall customer experience. One exciting avenue of refinement involves improving customer interactions with our service agents by analyzing conversations between clients and our service agent. Our solutions provides personalized feedback to each sales agent and their managers. This feedback focuses primarily on actionable insights regarding empathy management, helping agents to better connect with customers. Additionally, this analysis enables us to identify top-performing agents and provide customized training opportunities to those who may be underperforming. We are very excited about the opportunities that lie ahead of us as we continue to leverage technology to differentiate ourselves. From a commercial standpoint, we are enhancing SOFIA's B2C and B2B capabilities while driving further efficiencies in after-sales. These improvements not only bolster our overall business performance but have also meaningfully improved customer satisfaction. I now turn the call over to Amit who will review our second quarter performance. Amit Singh Thanks, Gonzalo, and good day, everyone. Our second quarter results were robust and demonstrate a consistently positive growth trend in terms of revenue and profitability. For the quarter, we reported total revenues of $185 million growing at 12% year-over-year, mainly due to the growth in our key markets, Brazil and Mexico where demand levels continue to be healthy. Throughout the quarter, we saw foreign exchange headwinds strengthen across the region at a level much higher than our expectation, which affected our second quarter results. When excluding FX fluctuations, year-over-year growth in revenue in constant currency terms was a very robust 46%, which we believe is industry-leading globally. Now let's take a more detailed look at our performance by the country, starting with Brazil, our most important market. As discussed on prior occasions, we continue to see very healthy demand trends in Brazil, exemplified by strong growth in transactions which increased 26% year-over-year. We achieved these strong growth numbers despite the floods in Rio Grande do Sul, which affected approximately 5% to 8% of our transactions in Brazil during the quarter. Turning to average selling prices which decreased 8.3% year-over-year to $472, largely due to FX headwinds. The growth in transactions, partially offset by lower average selling prices increased our gross bookings, expanding by a robust 22% on a constant currency basis to $618 million, on an as-reported basis, they grew 15%. When looking at our second most relevant market, Mexico, we see that gross bookings increased by 9.4% year-over-year on an as-reported basis to $294 million for the quarter, or 6% year-over-year growth in constant currency. This growth was primarily driven by an improving revenue mix, with higher margin international travel packages, contributing the most to Mexico's gross bookings. In addition to the growth in packages, we also focused on improving our market share in air travel, with domestic air being the second largest contributor to our gross bookings growth in the quarter. Turning to the rest of Latin America. Our gross bookings declined year-over-year by 10% to $460 million for the quarter, primarily due to FX pressures that affected average selling prices in Argentina and Chile. However, on an FX-neutral basis, gross bookings increased by 67% year-over-year in this area of our business. As part of our ongoing efforts to drive profitability, we continue focusing our commercial efforts on increasing non-air revenue. So we are pleased that packages as a percent of gross bookings grew by 190 basis points year-over-year, reaching 35% of our total bookings. In line with this strategy, our non-air revenue reached 64% of total revenue, or $118 million. As Damian noted, that drove a strong 13.8% take rate and contributed significantly to the $185 million in consolidated revenues. This translated into accelerating top line growth of 12% year-over-year, which was even stronger on an FX-neutral basis at 46% year-over-year. Although we continue to incrementally invest in growth in selling and marketing expenses, increasing 22% year-over-year in the second quarter, we remain mindful of the FX headwinds and carefully consider our overall cost structure specifically as it pertains to general and administrative and technology expenses. For the quarter, we achieved an adjusted EBITDA of $37 million, up by 22% year-over-year with a 19.8% adjusted EBITDA margin. As Damian explained in his opening remarks, last year's EBITDA included a one-time benefit of $9.8 million. When adjusting for this benefit, adjusted EBITDA growth would have been 82% year-over-year. Damian also pointed to our impressive year-over-year growth in adjusted net income, which reached $30.2 million for the quarter, increasing 397% year-over-year from $6.0 million of adjusted net income during the same period last year. As a reminder, our adjusted net income excludes largely non-recurring expenses from GAAP net income to facilitate comparison with Despegar's peers. Regarding our operating cash flow in the quarter, we generated $12.7 million in cash, compared to $28.9 million of cash that we generated during the second quarter of 2023. While CapEx during the quarter remained largely constant at approximately $8 million, similar to expenditure in 2023, the decline in operating cash flow was mostly affected by a temporary change in working capital related to some specific sale campaigns in the quarter. For the quarter, we reported a total cash balance of $204 million versus $244 million for the same quarter last year. The decline in overall cash balance was in line with expectations given the temporary change in working capital described before, extraordinary dividends to preferred shareholders as well as factoring expenses. We anticipate rebuilding our cash balance in the second half of this year in line with cash trends observed in prior years. Turning now to capital allocation. We continue to prioritize investments in our organic B2C, B2B, and white-label businesses to cement our leading position in Latin American region and drive growth beyond this region. As discussed before, we have plans to incrementally invest in loyalty, sales, and marketing and technology in the coming quarters to help us further solidify our industry-leading growth for the long term. We also continue to analyze potential M&A targets with the objective of either strengthening our regional position or expanding our reach beyond our home markets. When assessing a target, we maintain a disciplined analytical approach with a focus on generating meaningful revenue and cost synergies while enhancing our growth trajectory. Our strong cash position also provides flexibility to consider opportunities to increase capital efficiency by proactively managing our liabilities and financing costs. Now to talk about our outlook for the year. Our business continues to perform strongly despite some temporary flood-related headwinds in Brazil as discussed before. In fact, several areas of our business are performing much better than our expectation at the beginning of the year. However, FX headwinds this year are turning out to be significantly stronger than our expectation at the start of this year. Moreover, we believe it was important for us to divest the DMC business, which currently is a material contributor to our revenues, and further streamline our operations for even more robust growth in the coming years. Taking all of these factors into account, we have decided to lower our revenue guidance for the year from at least $820 million to at least $760 million. We expect to maintain a very solid growth trend in the coming quarters in constant currency terms, and we do expect our reported revenue growth in the coming years to materially accelerate from current levels. In addition to continuous solidification of our constant currency revenue growth profile, the company also continues to drive very significant operating leverage while at the same time incrementally investing into our growth initiatives. Moreover, we believe we have developed enough flexibility in our operating structure which helps us hedge our cost structure against FX volatility. We therefore, despite lowering our revenue guidance, feel very confident in raising our full year adjusted EBITDA guidance from previous levels. We now expect full-year adjusted EBITDA to be at least $160 million versus our expectation of at least $155 million before. Our updated adjusted EBITDA guidance implies year-over-year growth of almost 40%, which we believe is industry-leading globally. Our robust, constant currency revenue growth profile keeps us firmly committed to our long-term vision of becoming a global travel technology industry leader. Our best-in-class technology platform, market-leading brands and tailored commercial strategies combined with our market expertise will continue to form the backbone of our consolidation strategy while driving operational leverage. We are optimistic about the long-term growth potential for Despegar and remain confident in our ability to capitalize on the positive secular trends that underpin the travel industry. I'll now turn the call back over to Damian for a few closing remarks. Damian Scokin Thank you, Amit. To conclude, our second quarter results were robust, showing a sequential acceleration of top line growth in reported terms, industry-leading, constant currency growth, and strong profit trends despite our recent incremental investments in sales and marketing. We continue to see solid growth trends in our underlying business. We also continue to maintain our regional brand leadership, which will be further strengthened through our brand partnership with Shakira and our customer-centric focus remains a key pillar of our growth strategy, which is supported by Despegar's industry-leading technology platform and commercial excellence. Regarding our B2B growth pillar, our recent successes in signing new white-label agreements with leading brands further demonstrate our ability to provide substantial value to our business partners through a wide range of travel products available to their customers at competitive prices via our leading technology platform. We are particularly excited about the growth potential of this specific business segment, both within Latin America and beyond. Importantly, our commitment to innovation remains steadfast as evidenced by our continuous improvements in our AI travel assistant, SOFIA. We are also excited about the possibility of bringing the next level of SOFIA to our B2B partners in the future, while also continuously driving operating efficiencies within Despegar through the implementation of generative AI. Lastly, our key strategic objectives continue to expanding package revenue, driving direct traffic through our robust high performing app, and nurturing the continued success of our loyalty program. As we look ahead to the second half of the year, we remain committed to delivering unmatched travel experiences to our customers at affordable prices with the aim of further solidifying our leadership position in the market. Thank you. At this time, we will open the floor for your questions. [Operator Instructions] Your first question comes from Naved Khan with B. Riley. Please go ahead. Naved Khan Yes, great, thanks. Thanks a lot. So I just have a few questions, maybe first one on the guidance. Amit, so you think -- you've taken down the top line guide, you've erased the EBITDA guide, which is good to see, but within the top line takedown and then this increasing of this EBITDA. Can you maybe just walk us through the different pieces because you have effects headwinds, you have a divestiture of a business, and then maybe some impact of flooding which maybe, Can you just help us kind of think about the relative impact of all of these pieces? Amit Singh Sure. Thanks for the question, Naved. So, yeah, as you mentioned, we have lowered our top-line guidance, but at the same time raised our EBITDA guidance. So the puts and -- let me start with the top line first. The top line has a few puts and takes positives and negatives. First on the positive side, as we mentioned in the prepared remarks, the core underlying business continues to perform extremely strongly. And as I mentioned in several areas, we are doing better right now than we would be expected at the beginning of the year. One example being, and that more towards the end of second quarter, is our performance in Argentina, which currently is now doing better than what we expected it would be at the beginning of the year and we'll likely see the benefit of it hopefully in the coming quarters for this benefit to continue. So, that's on the core positive side. But then at the same time, like we mentioned, the FX headwinds, especially if you see how the Brazilian real, Mexican peso, and the currency in Chile have moved against us in, let's say, June versus May. This has created very significant effects headwinds for the full year. At this point, we estimate, based on our calculation, around $35 million, $40 million impact for the full year revenue numbers from FX. And then the third part, like we mentioned, we divested DMC, which we believe is a very positive decision for the company and as part of this divestment, and we also formed an alliance with World2Meet, which we believe has long-term value for us to drive synergies across various other countries and regions. We haven't specifically given the confidentiality of the deal. We haven't specifically talked about the exact dollar amount, but as we mentioned, DMC represents 600 of our 4600 employees. Obviously, the revenue per employee of DMC is slightly lower, but that should give you some idea. And then finally the flooding in the south of Brazil, which is a temporary event, and already we are seeing come back to normal over there. And in the next month or so we should be back to completely normal operations. But the impact over the last few months on a full year basis is around $5 million to $10 million negative impact on our revenue. So the core constant currency business are removing FX and all is doing better than what we expected at the beginning of the year. But we have the headwinds from FX and the short-term impact from flooding and then the DMC divestiture, which we believe is the right decision for the company at the time, which helps us further strengthen our growth going forward. Just to talk about the margins part, your question earlier. We, as we have gone through the year, obviously year-over-year, we have continued to improve our EBITDA margins and our overall cash conversion and generation of net income. If you see just the first half of this year, we have more net income than the last several years combined. So the company continues to make progress on that front. But what I would say is in the first half of the year, the progress has been much more -- we've been very positively surprised by the progress that we have made versus what our expectation was at the beginning of the year. And that is giving us the flexibility and the ability to raise our EBITDA guidance despite the impact from -- on the top line from, or the temporary impact from top line from FX and headwinds. And these efficiencies that we are driving are not just helping us counter the FX impact on top line, we are able to drive very strong EBITDA, but at the same time continue to invest very heavily in the business. We talked about investing in sales and marketing. We talked about our partnership with Shakira, the brand campaigns, our advertisements if you might have seen during Copa America. So we are doing a lot of things to further solidify our brand across Latin America and across the region, and potentially beyond while and making all those investments, but at the same time also delivering very strong operating efficiency quarter-over-quarter. Naved Khan Thank you. So maybe just on the -- maybe on the sort of a piece of that margin, part of the story. So I noticed that sales and marketing as a percent of the revenue was higher in second quarter on a year-on-year basis. First quarter actually lower. So was there something that was one-off and might come off in the subsequent quarter? How -- what's as the right way to think about sales and marketing leverage other increases, mostly fixed costs, or is it more variable? How should I think about that? Amit Singh No, I mean second quarter, like we mentioned, Shakira was a partnership that we signed in second quarter and it had, call it some upfront as in it goes for a few quarters, but those type of expense related to it. But then we are building campaigns around it. So what I would think of these investments are more incremental, right, more, but not like a sustained investment over long period of time. So these are more incremental investments that help us work with Shakira and drive our brand positioning in the regions and areas where we believe it can help us further solidify our top line in the coming years. Naved Khan So maybe just on that. So if I would think about social marketing in the back half on a year-on-year basis, likely to be elevated because of these, right? Amit Singh Yes, I mean, similar. We don't guide to, of course, -- these line items quarter by quarter, but our adjusted EBITDA margin sort of gives you an idea. If you look at the implied margin for the full year, that should give you an idea that we are planning to maintain margins around this level because of the investments that we are planning to make in the coming quarters and not just in sales and marketing. We have plans to invest in, as we have talked about in the past, we have plans to incrementally invest in tech and content. We have plans to invest in our loyalty program. So we're driving operating efficiencies, but we want to make sure that we continue investing in all these areas which position our company for a very strong or hopefully positions us in an even better position in the coming years. Your next question comes from the line of Andrew Ruben with Morgan Stanley. Please go ahead. Andrew Ruben Hi, thanks very much for the question and for the detail in the presentation. I'm curious to understand a bit on the country level, just looking at the FX-neutral bookings, Brazil up 22%, and that's despite the floods, but Mexico is up 6%. So if you could help kind of give a sense of what's going on between the two markets and perhaps [indiscernible] you've talked about the FX translation headwinds. I'm wondering how you're thinking about the FX impact on demand, outbound demand from these countries amid the weaker the currency effects. Both will be helpful. Thank you. Damian Scokin Yes. Hi Andrew, this is Damian. Thanks very much for your question. What we are seeing in terms of FX impact on demand is basically hitting ASPs at the moment. We are not seeing an evolution of transaction that is below our expectations. So that's why we have the perspective that this is more of a transitory effect on just ASPs because underlying demand remains strong. And basically, the different impact of Brazil and Mexico has to do with the intrinsics of the different markets and the relevance of domestic versus international in each of the geographies. That's basically it. Andrew Ruben Okay. Got it. That's helpful. And maybe take advantage of Sebastian being on the call here. On B2B, you talked about the active discussions in new geographies. I'd be curious to understand what the discussions are like as you're looking to expand in areas that are outside core LatAm? What kind of capabilities you might need that are similar or different, what kind of sales force or items on the ground in these other countries that you haven't necessarily had a presence in? Thank you. A - Sebastian Mackinnon Yes, thank you for the question. Yes, we are seeing a lot of opportunities in spite of the huge growth we are running now, not only within Latin America, because we still see an opportunity to expand, for example, our HTML solution to different markets in Latin America. We have just launched Argentina, Chile, Peru, Ecuador, and that doesn't require new investments, it's expanding our actual technology to those markets. So that's on regards of the small agencies and how we consolidate the off. That is very relevant in Latin America. So huge opportunity still in Latin America to expand to these markets, but also we see opportunities to expand globally so we can expand and we will expand with this platform, but also with the API solution where we are already in conversations with some new potential customers and with the white-labels platform. That is really performing very good because it's unique in the sense that we have a very adaptable and flexible technology that gives solutions not only to big high levels but also to mid and small ones. And that is a huge competitive advantage that we are noticing not only here in Latin America, but also globally. So I think we have opportunities with the three businesses, with the HTML solution, with the API solutions, and with a high-level platform. Your next question comes from the line of Jacob Seed with TD Cowen. Please go ahead. Jacob Seed Hi, this is Jacob. It's for Kevin. On the divestment of DMC, can you share what the revenue and the EBITDA contribution was prior to the investment? And what to expect going forward under the alliance agreement? Amit Singh Sorry, I missed your initial part. Do you mind just repeating the question? Jacob Seed Yes. On the divestment of DMC, can you share what the revenue and the EBITDA contribution was prior to the divestment? Amit Singh Yes. I mean, given the confidentiality agreement that we have with World2Meet related to this, unfortunately, we can't provide the exact dollar amount of revenue contribution from DMC, and that's why we're trying to provide metrics like its 600 employees out of our overall 4600 employees that were part of DMC. The revenue per employee was slightly lower for DMC given the nature of the business compared to the rest of the business. So hopefully this gives you some idea of the overall full year revenue impact. Obviously, the transfer of DMC happens from 1st August, so the impact is for that part only, that much part of the year, from August until December. In terms of margins compact impact on the business. Again, I would say that the DMC EBITDA margins were probably slightly lower than our overall company EBITDA margins. So as a company, for us, it was -- we believe the DMC, with this new alliance with World2Meet, has a lot of potential for growth through this alliance. But within Despegar this was -- we believe we didn't have the potential to grow this business at the same level or the very high growth levels that we had expectation for the rest of the business, plus its margins were slightly lower than the rest of the business. Jacob Seed Got it. Thank you. And another question, if I may, on the EBITDA raise. How much is that from the 13% of employees transitioning to the new owner versus other cost efficiencies, if you could break those out. Thank you. Amit Singh Yes, not much from -- I wouldn't say not much from the employee transition. I would say this is primarily from the efficiencies that we are driving. I mean, if you look at our cost of sales and what we are doing-- in second content, what we are doing in G&A, and even in sales and marketing, outside of the incremental investments, we are driving very strong efficiencies across all the line items. So there's not a very significant sort of positive impact from the divestment of DMC, but more from the efficiencies being driven in all the various line items. And we have time for one more question. And that question comes from the line of Brett Knoblauch with Cantor Fitzgerald. Please go ahead. Brett Knoblauch Hi, guys. Thanks for taking my question. Maybe just on the gross margin line, it looks like this was a record quarter in terms of gross margins. How much additional expansion do you see in the model? And how should we be thinking about that line item going forward, particularly given the divestiture? Amit Singh Yes, I mean, again, I wouldn't put as much on the divestiture part. Yes, it has very small benefit, but if you look at our cost of sales, from pre-pandemic levels, we are down 30%. And then now, as Gonzalo was talking about it earlier, the utilization of artificial intelligence throughout our cost structure is also going to help us materially and continuing to drive efficiencies there or is already helping us drive efficiencies there. Again, don't necessarily -- we don't necessarily guide to gross profit, but we hope that as we move forward and utilize more and more of artificial intelligence into various parts of our cost of sales, we might be able to drive more efficiencies. Brett Knoblauch All right. And then if I could just add one more on operating cash flow. It looks like you guys did about $60 million last year in the back half of the year. This year, through the first half of the year, down a good bit, I guess, how should we expect operating cash flow for the back half of the year, especially given the second quarter was impacted by some working capital dynamics? Do you expect that to unwind? Amit Singh Yes, I mean, generally, if you look at the trends, over the year, the second half is generally much stronger or significantly stronger operating cash flow generator for us compared to first half, especially quarter four. And then this year specifically from quarter two to quarter three there is some movement given this -- given some of the sale campaigns and all that, we launched in quarter two, which will have a more positive impact going forward, and some call it the timing-related impact in Q2. And thank you. And now I will turn the conference back over to Mr. Scokin for any closing comments. Damian Scokin Hi. So I wanted to thank everybody for your interest in Despegar, and we look forward to talking to you again in our next earnings call. Thank you very much. Bye. And this concludes today's conference call. Thank you for your participation, and you may now disconnect.

Paycor HCM (PYCR) Q4 2024 Earnings Call Transcript | The Motley Fool

Greetings, and welcome to the Paycor fourth quarter 2024 earnings call. At this time, all participants are in a listen-only mode. A 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 you to your host, Rachel White, vice president of investor relations. Thank you, Rachel. You may begin. Rachel White -- Vice President, Investor Relations Good afternoon, and welcome to Paycor's earnings call for the fourth quarter and fiscal year 2024, which ended on June 30th. 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 site. Today's call is being recorded, and a replay will be available on our website following the conclusion of the call. Statements made in 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. 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 fourth quarter and full year results. Our unique value proposition of empowering leaders to drive people and business performance continues to win in the market and help drive revenue growth of 18% for the quarter. For the fiscal year, our team executed against our strategic growth initiatives, increasing the average number of employees on our platform by 9% and expanding the amount we earn per-employee per-month, or PEPM, by 6%, resulting in 19% revenue growth. We delivered significant adjusted operating income and free cash flow margin expansion this fiscal year while strategically investing in our platform and customer experience. Demand remains healthy as most employers are struggling with antiquated and incomplete HCM tools. Top-of-funnel metrics, including leads and first-time sales appointments, increased significantly year over year. And our win rates remained elevated as our value proposition resonates in the market. We continue to focus marketing investments in sales hiring in the 50 largest cities in America, where we see the most opportunity. Our sales team grew 9% this year to 600 sales professionals, which increased our sales coverage in the 50 largest U.S. cities from 52% to 55%. Average tenure, which drives seller productivity, increased 20% among our field sellers. A core component of our go-to-market strategy is developing and maintaining partnerships with key centers of influence. Benefit brokers help us identify employers that are dissatisfied with their legacy HCM tools and influence nearly half of our field bookings this year. Our mid-market product, client experience, and sales investments over the last few years continue to pay off as our average customer size and average deal size expanded for the third consecutive year. Since the IPO, the average size of our new mid-market customers increased 30%, helping to grow our average deal size by 55%. We are efficiently extending our distribution via the indirect embedded channel we announced earlier this fiscal year. Our strategic partners enhance their revenue per client and customer retention by offering a modern embedded HCM solution to their clients and prospects. In this past quarter, we continued converting our third partner's portfolio, and the three new partners we announced last quarter began selling. We also signed several new partners this quarter, tripling our indirect partners over the last year. Our team also continued expanding our award-winning HCM platform with valuable new capabilities for our customers. Our product investment remains focused on deepening our core platform, further enriching our talent solution and enhancing the connectivity of our platform. This year, we released technology that empowers leaders, such as pay benchmarking, Paycor Paths, and labor forecasting, and increase the value of our suite by $8 to $53. Within our core platform, we recently launched a new compensation management solution that streamlines budgeting and pay cycles and adds another $2 to our suite. Our collaborative tools foster alignment across teams, helping leaders ensure equitable and competitive compensation within budget while driving employee engagement. Revenue from our robust talent suite increased nearly 40% again this fiscal year, validating our unique value proposition of empowering leaders to coach, optimize, and retain top talent to drive business results. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. We also significantly advanced our interoperability strategy this year. According to Finch, half of HR professionals leveraged seven or more employment systems. And most of these applications are not integrated, leading to errors and inefficiencies. API use on our platform increased approximately 300% this fiscal year, demonstrating growing demand to extend HCM software to other business applications. We provide customers unrivaled flexibility to seamlessly connect their data and systems, enabling leaders to automate time-consuming, error-prone manual tasks. We have 300-plus pre-built integrations in our marketplace and made it easier to create custom integrations by increasing the number of API endpoints and our developer portal by more than 40% this fiscal year. The innovative developments we've made in our HCM platform continue to garner industry recognition. In May, Paycor won five TITAN Business Awards, spanning HR, analytics, workforce management, and talent. These tools empower leaders to connect and automate their back office, freeing them up to focus on what matters: building winning teams and driving business results. As we entered fiscal '25, we reflected on our strategy execution progress since the IPO. Over the last three years, we have grown revenue by over 85%, increased it adjusted operating income by over 130%, and generated nearly 50 million more in free cash flow, while expanding our sales capacity by greater than 60% and advancing our industry-leading HCM platform, growing our list PEPM by more than 50%. We have made tremendous progress, and the opportunity before us is significant. On our path to $1 billion in revenue, we remain confident in our ability to deliver attractive growth while accelerating margin expansion. We believe there is a long runway to drive durable growth given the size of our market opportunity and the ongoing success we have had displacing legacy solutions, which represents 75% of our bookings. Our go-to-market motion has strong momentum as we are staffed to deliver our fiscal '25 targets and encouraged by how sales tenure and retention are trending. We have significant room to drive leverage as we scale. And our top priorities are to drive sales efficiency and accelerate cash conversion. As such, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We will do that while continuing to invest in our strategic growth initiatives, namely adding employees through sales expansion and increasing PEPM through product innovation. This progress wouldn't have been made possible without the efforts of our dedicated associates. I'd like to thank the team for their hard work and support in delivering these strong results. Now, 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 fourth quarter and full year financial, and then share our outlook for the first quarter and next fiscal year. As a reminder, my comments related to the financial measures are on a non-GAAP basis. We had another solid quarter, delivering total revenues of $165 million, an increase of 18% year over year. Recurring revenue grew 17% over the prior year. For the fiscal year, total revenues were $655 million, increasing 19% year over year. Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. This quarter, employees grew 8% over the prior year, driven by new business wins with a modest contribution from labor market growth. Net revenue retention was 98% this year, in line with our expectations as the labor market growth moderated. In a typical macro environment, labor market growth contributes a point or 2 of our revenue growth. While the U.S. labor market growth moderated over the last 24 months from historical highs of 3 to 4 points of revenue contribution, now closer to zero, it has remained slightly positive. We finished this quarter with approximately 30,500 customers, utilizing our platform to help coach, optimize, and retain nearly 2.7 million employees. We continue to see our average customer size and average deal size increase as we continue to move upmarket, demonstrating the success of our product and service investments. Similar to last year, mid-market customers represented 80% of our portfolio, with enterprise contributing 15% and a micro segment of under 10 employees contributing just 5% of revenue. Effective PEPM increased 8% year over year to nearly $19 this quarter. Excluding embedded HCM deals, effective PEPM increased 10%, fueled by expansion of our product suite. The growth in effective PEPM is attributable to cross sales, pricing initiatives, and higher bundle attach rates. And talent has consistently demonstrated strong attach rates and cross-selling traction. Our embedded HCM channel continued to ramp and contributed 2 points of employee growth again this quarter. We have increasing demand from partners, and our pipeline grew sequentially for the fourth consecutive quarter. Although we are pleased with the progress and expect to at least double our embedded revenue in fiscal '25, it will take some time before it materially impacts our revenue. We continue to invest to scale and capitalize on this opportunity by expanding our capacity, our offering, and sales enablement tools to drive mutual success. This quarter, we generated $14 million of interest income on average client funds of approximately $1.2 billion, an effective rate of 490 basis points. In addition to achieving consistent top-line growth, we have continuously expanded operating margins on an annual basis. Adjusted gross profit margin, excluding depreciation and amortization, was 79% for the quarter and year. This quarter, it decreased by 40 basis points over the prior year due to macro headwinds, however, expanded by 40 basis points for the full year. This quarter, sales and marketing expense was $51 million, or 31% of revenue, down nearly 300 basis points from a year ago, largely driven by more moderated sales headcount growth and our focus on efficiency and scale. For the year, sales and marketing expense was $198 million, or 30.2% of revenue, an improvement of 160 basis points year over year. On a gross basis, we invested $25 million, or 15% of revenue, in R&D this quarter to continue differentiating our HCM suite and expanding our PEPM opportunity. We all invested 15% of revenue in R&D for the year, similar to prior years and in line with our long-term targets. As we scale the business, we have consistently driven leverage in G&A. G&A expense was $20 million, or 12.1% of revenue this quarter, an improvement of 280 basis points from last year. On the full year, we achieved 150 basis points of leverage from G&A. Quarterly adjusted operating income increased over 60% to $25 million with margins of 15.2%, up 420 basis points from 11% last year. For the full year, adjusted operating income rose 36% to $112 million, up 215 basis points while differentiating our service and solution. During the quarter, we generated $37 million of adjusted free cash flow at 23% margin, up nearly 9 points. For the full year, we generated $40 million, or 6% margin, an improvement of 430 basis points. Free cash flow margins expanded at twice the rate of adjusted operating income margins as we scale the business and continue to focus on efficiency. We ended the year with $118 million in cash and no debt. In addition, our stock-based compensation expense decreased year over year to less than 10% of revenue with less than 1% share dilution. Entering fiscal '25, our top priorities are to drive sales efficiency and accelerate cash conversion. While growth remains our top priority, we believe a more balanced approach to profitability will maximize shareholder value. As Raul mentioned, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We plan to achieve this by balancing sales headcount growth with sales productivity to improve go-to-market efficiency and continuing to drive leverage in G&A as we scale. Similar to the dynamics this year, we expect adjusted free cash flow margins to continue expanding at roughly twice the pace of adjusted operating income margins. Our outlook for fiscal '25 remains positive based on a healthy demand environment and opportunity to drive continued PEPM expansion. However, our guidance does reflect a fluid macro backdrop, including labor market headwinds and a declining rate environment, and, of course, some conservatism at this point in the year. For the first quarter, we expect total revenues of between $161 million and $163 million, or 14% growth at the high end of the range, which includes $12 million of interest income on average client funds balances of just over $1 billion. And adjusted operating income is expected to be between $17.5 million half and $18 million. For the full year, we expect total revenues of $722 million to $729 million, or 11% growth at the top end of the range, including $48 million to $50 million of interest income, which contemplates up to 200 basis points of rate cuts over the next fiscal year. And we expect adjusted operating income of $123 million to $126 million. On a recurring basis, that implies more than 100 basis points improvement in adjusted operating income margins. In summary, we remain optimistic about our opportunity in HCM. Demand remains healthy for our innovative HCM solution that empowers leaders to unlock the potential of their people and business performance. Our solution is mission critical to attracting, paying, and retaining great talent. We're confident in our strategy and focused on executing a proven go-to-market playbook to deliver greater sales efficiency and free cash flow margins. With that, we'll open the call for questions. Operator? Operator [Operator instructions] Our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question. Terry Tillman -- Analyst Yeah. Hey there, Raul, Adam, and Rachel. Hopefully, you can hear me OK. I had a question and a follow-up per instructions. The first question is just on -- maybe, Raul, kind of ending the year, looking for a strong finish in bookings, how did -- what's the report card on the enterprise segment, which you've been excited about those thousand-plus employee businesses? And then, mid-market, what was the bookings like versus your expectations? And the second part of that first question is, you know, I heard something about conservatism. Are you assuming kind of, you know, kind of slow or kind of close rates? Or what are you assuming around bookings activity in both of those key segments? And then, I had a follow-up for Adam. Raul Villar -- Chief Executive Officer Yeah, the bookings -- thanks, Terry. The bookings for the quarter were really consistent and were well-positioned to deliver our FY '25 guidance. And we feel good about the trajectory of the organization. Terry Tillman -- Analyst OK. And then, maybe just to follow-up, it's interesting in terms of a bunch of comments around free cash flow progression and acceleration and then the 20% target. Adam, I was hoping maybe we could unpack a little bit more, you know, just any guardrails in terms of duration, the size of the business to get to that target. And is there anything more notable on G&A or sales and marketing leverage to get there as well? Just a little bit more, hopefully, to unpack on, you know, when you get to that, what that would look like in terms of some of those dynamics. Yeah. Hey, Terry. Yeah, I mean, no explicit timeframe other than, you know, sort of medium to long term as we think about our continued progression. There's not going to be any sort of structural pops that are going to get us to 20%. I think it's going to be, you know, continued expansion. And this year, clearly, it looks like we're on that sort of inflection point as we think about, you know, continuing to expand and driving faster free cashflow conversion. So, I think that trajectory makes sense for us. And in terms of like getting there, I think you're going to see it, of course, across the board. There's still opportunity across G&A. Over time, we think that there's some further opportunity across R&D and gross margin. But I think the majority, where we're going to see the real difference is going to come out of the cost of acquisition. So, between our implementation and our go-to-market teams, it's really around leveraging that investment. And we're starting to drive some of that efficiency now, so you're seeing some of that show up. But we have probably eight to 10-plus more points to go over the next couple of years that I think will be a big contributor to free cash flow margins. Operator Thank you. Our next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question. Gabriela Borges -- Analyst Hi. Good afternoon. Thank you. I'll ask Terry's question on the long-term free cash flow margins in a slightly different way. Raul and Adam, we've spoken before about your conviction in Paycor being a 20%-plus growth company. Do you aim for being a Rule of 40 company when delivering 20%-plus free cash flow margin? Meaning, how do you think about the long-term normalized profile of revenue growth given, you know, some of the changes in the sales and marketing and some of the newer options like embedded finance that you've talked about in the last couple of quarters? Raul Villar -- Chief Executive Officer Yeah. Hey, Gabriela. Yeah, we feel still really good about the opportunity. I mean, the market continues to be huge. We see a huge opportunity. We're well-positioned in the product. We see some sluggishness right now in the macro that is going to make that harder. Clearly, didn't achieve the target here in this last year. But we've been actually really consistent and close to the 20% growth over the last couple of years on a recurring basis. So, it's still our long-term target. And I do think that -- we think that it requires some labor market growth, it's going to require, you know, a little bit stronger macro than where we are. But nothing structurally is in the way from us continuing to grow and achieve that, to your point, you know, sort of the Rule of 40 on both the revenue and free cash flow target. So, I think we're going to balance that in. We're going to lean into the productivity right now. We'll make sure we're set up from a sales perspective. And we feel good about that set up into '25. And as we think about long term, you know, we're not coming off of what we see in the market opportunity. And again, our products are so well-positioned right now. We feel really good about that over the long term. Gabriela Borges -- Analyst That makes sense. And I'll ask a follow-up on the near term. Talk to us a little bit about how you are feeling about your ability to retain, train, and enable the salespeople. You mentioned that bookings have come in nicely toward the end of the year. So, give us a status update on how the churn in the sales world is trending, and how many sales count ads do you expect. Or how much do you expect to grow sales count capacity in fiscal year 2025? Thank you. Raul Villar -- Chief Executive Officer Yeah. Thanks, Gabriela. I think, you know, in Q4 retention improved, and we feel that the territory redesign was well-executed and well-received. And, you know, we're looking at our sales capacity, and we feel like we have plenty of capacity to achieve our FY '25 targets. And, you know, obviously, to Adam's earlier point, you know, we'll balance in, you know, more sales hiring as the macro gets better. But we feel well-positioned today, both from a tenure perspective and a capacity perspective to achieve our targets. Operator Thank you. Our next question comes from the line of Siti Panigrahi with Mizuho. Please proceed with your question. Siti Panigrahi -- Analyst Hi. Thanks for taking my question. Very good execution on this tough market. So, Raul, my question is, when you -- I understand the sluggishness you talked about, maybe that's impacting the new logo acquisition. What are you seeing in terms of customer and cross-selling your new products to the customer base? I know you have been expanding the product footprint and recently added even compensation. How should we think about the effective PEPM growth this year? What's the assumption in your guidance? Raul Villar -- Chief Executive Officer Yeah. Hey, Siti. What we saw in Q4 was actually some slight acceleration, which was actually a little bit overweighted from some of the cross-sell opportunities. So, we saw a little bit more success here in Q4. And I think as we go forward, we're really expecting to see a little bit less PEPM growth, a little bit less PEPM expansion as we add, you know, more in the enterprise space, as we add more in these embedded partners. We're going to see the PEPM slow down and really lever into the employee growth. But I think actually, you know, in this quarter and maybe in the near term, you might see a little bit more of that balance in the PEPM expansion as we've seen some success on the cross-sell side pick up even a little bit further. So, we're seeing good attach rates, good success, like we called out earlier, on the talent, and that progresses or that continues. Siti Panigrahi -- Analyst Yeah. And then, a follow-up to that embedded HCM. I know it's been a few quarters since you launched. So, how is the progress so far? And what kind of traction are you seeing among your partner base and even to their customer? Raul Villar -- Chief Executive Officer Yeah. So, the traction has been really strong. I mean, as we announced it in Q1, we've seen continued growth in the pipeline each quarter. We've tripled the number of partners that we've added this year. We continue to go through the migration of some of our larger partners as well. And so it's becoming a -- you know, it's really gaining traction. It's still a relatively small portion of the overall portfolio, less than half a point of the revenue here in '24. We could double that into '25. But there's a lot more room to grow and continue to overall meaningfully impact our revenue over the long term. So, we're, you know, still really optimistic about this channel and its long term potential. Operator Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question. Samad Samana -- Analyst Hi. Good evening. Thanks for taking my question. Maybe first just as a follow-up on the embedded side to Siti's question. On your comment that you expect embedded revenue to double in fiscal '25 and your kind of, no pun intended, embedding that in your guidance, how should we think about that between you adding additional ISVs that will embed the software versus growth of the existing partners that you've already inked and what you foresee in terms of their ramp? And can you just remind us how those contracts work? Are there any guaranteed minimums? Just anything that helps us kind of get a view on the visibility that you have there. Adam Ante -- Chief Financial Officer Yeah. Hey, Samad. You know, we wouldn't include new partnerships that we haven't signed necessarily inside of our guidance. So, all of the revenue is really going to be -- and the expectations are going to be from partners that already exist. And those partners, of course, include their existing portfolios and new business that they're signing as we think about, you know, what's reasonable is what we would include in our guidance going into '25. In terms of the structure of those deals, there are some that have minimums for sure. We try to balance those in as -- depending on sort of the size and the need of the portfolios and how much needs to come over and how much work we need to do to necessitate it. But we do have structures that may include some minimums. Most of it is really based on more of the usage and how much business, you know, our partners are adding to the platform now. Samad Samana -- Analyst Understood. And then, Raul, maybe just a question for you. In terms of upmarket success, you guys continue to call that out. It's been increasing in the mix. And I know you've talked about some changes in the sales organization. How should we think about how the sales organization's composition looks today and how well it's going to prepare to attack that larger customer opportunity? And as you think about fiscal '25, is there a different type of rep that you're aiming to hire? Or is there a different type of training program to target those larger, more sophisticated customers? Raul Villar -- Chief Executive Officer Yeah, Samad, thanks. You know, from a training perspective, obviously, we continually enhance our training to meet the different needs of the different segments that we have. So, we're continuing to do that. And the way to think about it is a third of our organizations pointed at that, you know, 500-plus segment and the two-thirds are pointed below. And we think that's a really good optimal mix for us today. And, you know, we're seeing the benefits of our platform really pulling us upmarket. And now, we're pointing, you know, really qualified tenure, you know, our best-of-the-best Navy SEALs type of reps against those opportunities. And so, we're seeing success there. Operator Thank you. Our next question comes from the line of Scott Berg with Needham and Company. Please proceed with your question. Scott Berg -- Analyst Hi, everyone. Nice quarter. And thanks for taking my questions here. Raul, I wanted to see if you can help us reconcile your view on the market versus other competitors, both public and private. Talk about maybe a little bit more of a slowing market than you all talked about. You described really healthy sales and pipelines and what you thought was a pretty robust market. But maybe you can help us dissect why your view seems to be at least marginally different than others in the space. Raul Villar -- Chief Executive Officer Yeah, I mean, when we look at the market in the -- in our platform and our position in the market, you know, we just look at, you know, the key components of, you know, first appointments, deals that are in process, the velocity of the transactions. And when we look at it, we think, you know, what the -- the market's pretty strong. And, you know, we finished the year with 16% recurring revenue growth. And, you know, without headwinds, we would have been, you know, close to 20%. And so, we still feel like it's a big macro market with 75-plus percent, you know, of the opportunity on what we would consider legacy, antiquated, incomplete solutions. And we have a great product, modern, robust, with some great tools that's really attractive. So, for us, it's just about execution and continuing to execute. And we see the market really strong and robust. And some of it could be, you know, Scott, the size of Paycor compared to others. But outside of that, we think the market is, you know, really big and still in the early innings of transformation. Scott Berg -- Analyst Understood, helpful. And then, Adam, in your guidance, you talked about 200 basis points of rate cuts for the year. We view that certainly on the conservative side, you know, relative to what we're seeing out there today, which is probably appropriate. But how should we view, you know, seat usage at existing customers? You talked about how that, you know, went from a nice tailwind to, you know, more of a flat metric year over year. But how are you thinking about seat counts in the guidance? Adam Ante -- Chief Financial Officer Yeah. Hey, Scott. We intentionally didn't include any incremental labor market growth in our guidance. So, we're effectively assuming a flat labor market contribution similar to what we saw in '23. So, there might be a slight headwind, '23 to '24, but there wasn't much contribution in '23, and we're assuming the same thing here into '24 -- excuse me, '24 into '25 now. Thanks, Scott. Operator Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question. Brian Peterson -- Analyst Hi. Thanks for taking the questions. So, the top-of-funnel comment sounded really encouraging as you close out the year. Did that actually improve or was it above your expectations for the fiscal fourth quarter versus what you saw earlier in the year? Any way to unpack that a bit? Raul Villar -- Chief Executive Officer Yeah, I mean, it's been fairly consistent throughout the year. And, you know, so for us, it's been, you know, how can we continue to execute against the opportunities? And it was slightly elevated in the fourth quarter. But I would say, all in all, pretty consistent throughout the year. Brian Peterson -- Analyst And any changes to the share donors that you guys are saying? I know we hit on some of the regional players and some of the legacy players. But anything in terms of the new business you're bringing on? Has that mix changed at all over the course of the year? Thanks, guys. Raul Villar -- Chief Executive Officer I mean, it changes slightly. Seventy-five percent of our bookings are still what we would consider from legacy incumbents, in-house, regional, ADP, and Paychex. It moves around quarter to quarter a little bit. And in the quarter, we had a little bit more contribution from ADP and Paychex than previous quarters. Operator Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question. Jared Levine -- TD Cowen -- Analyst Thank you. Can you discuss how gross revenue retention changed year on year? Even if it was consistent, were there any underlying changes based on employer size segment or controllable versus uncontrollable churn? Adam Ante -- Chief Financial Officer Hey, Jared. Yeah, no, I mean, it's been fairly consistent. It does pop around. You see like a little bit more pressure on the smaller end of the market for sure, and we have seen a little bit more success in the enterprise space. But overall, I think actually the labor market growth really impacted it more than anything. So, you saw it tick down a couple of points, which, again, was really all of that labor market slowness that we saw relative to last year, but fairly consistent otherwise and what you would expect given some of the comments around upmarket success in the enterprise and the softness on the smaller end of the space. Jared Levine -- TD Cowen -- Analyst Got it. Thank you. And then in terms of ERTC, can you update us if there was any of that revenue in 4Q and then the headwinds that represented, and is there any assumed -- and what the headwind assumed for '25 is? Adam Ante -- Chief Financial Officer Yeah, it was effectively immaterial in Q4. We had anticipated it in the guidance to come out, and so it was immaterial in '24 -- excuse me, in Q4. And we're not including anything in our guidance for ERTC for '25. So, it will be about 1.5 points headwind relative to '24, just as that's completely gone. Thank you. Our next question comes from the line of Bhavin Shah with Deutsche Bank. Please proceed with your question. Bhavin Shah -- Deutsche Bank -- Analyst Great. Thanks for taking my questions. Raul, just one clarification. You talked about earlier about feeling good about the level of sales capacity today. I just want to just clarify that kind of means no new net hires until the macro improves? Is that the right way to read it? Raul Villar -- Chief Executive Officer No. We're fully staffed for FY '25 and, you know, we'll continue to add throughout the year. You know, we have a plan to continue to add, but we'll either increase or decrease that based on market conditions. So, we're going to be flexible and make sure that, you know, we're investing properly in that area. And, Bhavin, just to be clear, I mean, we're -- hey, Bhavin, just to be clear, we are going to increase capacity through both sales hiring and productivity as we're thinking about growing into '25. So, we'll continue to grow from where we are today. Bhavin Shah -- Deutsche Bank -- Analyst Perfect, thanks for the clarification. And kind of certainly back on the embedded opportunity, can you just provide a little bit more insight in terms of some of the recent signings or kind of what you have in the pipeline today in terms of like the demographics of these customers? Are they still in profile from what you have already in the platform? Do they have existing businesses that you can migrate over? Just any other insight would be appreciated. Adam Ante -- Chief Financial Officer Yeah, for sure. I mean, so we're really excited about some of the new partnerships that we've been able to sign. Some of them are a little bit different in terms of like a payroll service bureau style partners, but then some more vertical software specific like ERPs and POS type fintech and companies. So, I think that there's some, you know, continued success that we're seeing building off of what we've already shared. So, I think that you're going to continue to see that, you know, vertical-specific workforce management and softwares within the ERP space as well. So, we're excited about those. They're a little bit smaller than -- some of those partners are a little bit smaller than some of the earlier partnerships that we've signed that have quite a few more employees and portfolio sizes. And so, I think that will be a balance in as we continue to progress. Not all of them are going to have large portfolios. So, we'll balance that in. And it'll probably be a little bit choppy just in terms of the types of partners that we bring in over the next year as we continue to scale this up. But the pipeline itself continues to grow with those similar type partners. Operator Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question. Mark Marcon -- Analyst Good afternoon, and nice quarter. Wondering if you can talk a little bit more about, you know, some of the new modules. I mean, you've obviously had great traction with your applicant tracking solution. Wondering how much further you can penetrate the existing client base. And if you can talk a little bit about the newer modules that you've come out with in terms of employee compensation and how that ends up fitting in. And then, I had some follow-up questions with regards to the inside sales force. Raul Villar -- Chief Executive Officer Yeah. Hey, Mark. It's Raul. You know, we have a tremendous amount of white space available to continue to cross-sell. The majority of the PEPM expansions happened over the last five years. And obviously, we have a large client base that we can continue to cross-sell in. And we continue to invest and grow our cross-selling team, and we saw some of that success in our fourth quarter over performance. And so, that was nice to see. And we'll continue to do that. Obviously, talent is really significant. It's a broad portfolio, both attraction and retention. And, you know, we're continuing to press in on the talent solution. From a compensation perspective, giving frontline leaders the ability to equitably provide compensation increases across their teams and an equitable fair and within budget really just enables a frontline leader to be more effective during that process. And so, we think that fits right in to our leader strategy and really helping empower frontline leaders to build winning teams. Mark Marcon -- Analyst Can you talk a little bit about the size of the internal sales force that's cross-selling into the existing base and, you know, where does that stand relative to the total of 600? And how big could that become? Because it seems, I mean, particularly on talent, it's a great solution. Raul Villar -- Chief Executive Officer Yeah. I mean, we're still -- as you know, we're still focused more on new. You know, by and large, the majority of our assets are pointed at hunting new clients. However, about 10% of our organization is focused on cross-selling, and that's been growing year over year. And I think you'll continue to see us, you know, press in there because there is such a big white space opportunity. Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question. Arti Vula -- JPMorgan Chase and Company -- Analyst Hey, this is Arti Vula on for Mark Murphy. Congrats on the quarter, and thanks for taking the question. Quick one, just any divergences to call in terms of demand patterns by customers in terms of geography or end market or any other relevant dimension? Raul Villar -- Chief Executive Officer No, demand has been really consistent by size, by markets, by industries. We haven't seen any significant changes from that perspective, Arti. Arti Vula -- JPMorgan Chase and Company -- Analyst Thanks. And then, you know, looking at your slide deck, you have a -- that you've kind of reached sales force coverage among the top 50 metros to about 55%. And then, that was 52% last year and 44% the year before that. Is there a framework of how we should think about that going forward in FY '25, whether that'll accelerate or not, and how that fits into the fact that you're kind of fully staffed to deliver on your targets -- FY '25 targets now? Thanks. Raul Villar -- Chief Executive Officer Yeah, Arti. We're going to continue to increase coverage, you know, throughout the year. I wouldn't expect, you know, dramatic coverage enhancement. I would say that, you know, we'll continue to add heads. You know, as I said earlier, we're trying to be intentional about headcount acceleration and leveraging the capacity of our existing sales organization while we continue to add reps in each of those 50 markets where appropriate. So, we'll continue to grow, and that number will be higher, you know, this time next year. Thank you. Our next question comes from the line of Steve Enders with Citi. Please proceed with your question. Steve Enders -- Citi -- Analyst OK, great. Thanks for taking the questions here. I guess maybe just following up on the last point of the top 50 sales coverage, and it seems like it's a bit of a shift away from the prior Tier 1 coverage number that you previously kind of reported on. I guess, what's kind of driving that shift? And I guess, what does that maybe signal about how you're thinking about that opportunity there? Raul Villar -- Chief Executive Officer Yeah, Steve. How are you? It's Raul. It really isn't a shift or a change in strategy. We've always been focused on the 50. We were extremely barren in the top 15 or the Tier 1, and we've continued to move that percentage up. And as we look at continued ongoing seller growth, we will continue to add in all 50 markets over time. It just will be based on opportunity and finding the right person and having the right opportunity available for that person. So, I don't think it's a change in strategy. We still love the top 15 cities. We're going to continue to add headcount in all 50 markets. And that's what comprises, you know, where our 600 sellers sit today. And so, we're -- we just felt like it was more directional for everyone to understand the top 50 cities and where we sit from that perspective. Steve Enders -- Citi -- Analyst OK, gotcha, that's helpful. And then, I guess just on the free cash flow side. I mean, pretty -- looks like pretty solid performance here in the quarter. I guess anything to call out that helped kind of add to that performance here? And I guess anything that kind of seems maybe got pulled forward, or maybe there's some like timing shifts in there? But just, I guess, what does that kind of indicate as well for fiscal '25 in the free cash flow dimensions there? Adam Ante -- Chief Financial Officer Yeah, I mean, clearly, on the quarters, there's quite a bit of networking capital changes. So, like within the year it's a little bit harder to look at. But we're trying to manage this to the full year, so I think that dynamic of the expansion on the full year is really important. But, you know, we'll continue to smooth out those networking capital items over time. And the primary driver of the free cashflow benefit is still the overall expansion and productivity that we're getting out of the cost of acquisition in this case in this year. And we're seeing the same thing out of G&A. So, most of it is driven by the operating. And then, within the quarters, you have some of those networking capital items. Thank you. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question. Daniel Jester -- Analyst Great. Good evening, everyone. Thanks for taking my question. Maybe we could spend a moment -- we talked about the mix of booking, 25% come from other solutions which are modern or new. Can you just remind us like why does Paycor win in those circumstances? It's clear relative to the legacies, but relative to the more modern solutions, why are you winning? Raul Villar -- Chief Executive Officer Yeah, I mean, I think strength is our platform, most open platform, most robust platform. And our win rates are up, and our share in winning from modern cloud competitors continues to increase and reach a high in FY '24 as a percentage of the mix. So, we feel really well-positioned to compete against legacy and especially to compete against modern. It's a really deep platform. We offer the most PEPM, which, in theory, ties to feature functionality. So, ultimately, we have the most robust platform. We have the most modern platform and the most open platform, and that's why we're winning. Daniel Jester -- Analyst Thank you for that. And then, Adam, maybe I missed this in the prepared remarks, can you remind us, what's going on with gross profit margins? It looks like they were down year over year. Is there anything that you'd call out there? Thanks. Adam Ante -- Chief Financial Officer Yeah. Hey, Dan. Yeah, the primary drag in that case was really the form filings just sort of pressure that we saw coming out. We actually saw some really good underlying operating expansion -- margin expansion apart from those and we'll continue to press into that for '25. There's a little bit more margin pressure that we'll see from that, you know, high-margin form filings revenue that's going to -- the rest of that that's going to leave here in '25. But we'll work through that this year and be able to show, you know, continued expansion. Thank you, our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet -- Analyst Good afternoon. Thanks for taking the question. I guess, when you look at some of the additional modules and the attach rates you're seeing and some of the momentum behind that, where do you feel like you're looking to put the most behind the R&D budget? And in so much as you look at M&A, are there areas of the portfolio that you think are sort of primed to add additional capabilities as you've seen demand for the attachment there? Raul Villar -- Chief Executive Officer Yeah, I mean -- hey, Matt. Thanks. It's Raul. I think, you know, we think about our R&D investment in three big buckets, continuing to, you know, enhance, you know, our core platform. Obviously, continuing to deepen our talent solutions, which are best in class already, and then continuing to make it the most open platform in the category. And those are the three areas where we continue to invest in, and we feel really good about it. From an M&A perspective, there's no one area or one gap in the platform, you know, that we're looking to fill. I would say there's hundreds, if not thousands of cottage categories that kind of surround the HCM ecosystem that we're always looking to evaluate. And so, that's an ongoing process. We're always, you know, looking for great solutions that can help our leaders build winning teams. Matt VanVliet -- Analyst All right, very helpful. And then as you look at -- a lot of success across software seems to be in verticalizing your offering to make it a little more market ready. You've talked a lot about embedded solutions and some of your partners. But how might you be able to use AI, and maybe specifically gen AI, around the talent and training side of it, as well as employee engagement to really help broaden the verticalization of your product to be a little more out of the box ready? Adam Ante -- Chief Financial Officer Yeah. Hey, Matt. I mean, actually, the AI that we're driving right now, the majority of where you're seeing it show up is inside the talent solution and inside the talent suite. There's a lot of sentiment capability, like the job description generator sort of functionality. So, there's a lot of functionality around that, talent attraction and recruiting. And then, we'll continue to look for those opportunities, not just look for those opportunities, but building those opportunities around some of the more sort of proactive nudging as folks are working through their workflows inside of the system and making those workflows easier to navigate so that the clients don't have to spend quite as much time inside of there and they can focus on, you know, more of the leader and performance management tasks that are more critical to the organization. And we're looking at some of that gen AI -- and again, sorry, not even just looking at it, but working through some of the gen AI type chat functionality that we think are going to be really additive for our customers as well. Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question. Jake Roberge -- William Blair and Company-- Analyst Yeah, thanks for taking the questions. Just wanted to follow up on the embedded strategy. When you look at the pipeline of new partners, are they primarily ones with an existing portfolio? Or are you looking at partners that are more on the sourcing side as well? And then, have there been any learnings for that motion now that you've been able to onboard the first few partners throughout this year? Raul Villar -- Chief Executive Officer Yeah. Hi, Jake. It's Raul. I think, you know, obviously, you know, the portfolio will be a mix. There are more embedded candidates without portfolios and with portfolios. You know, obviously, we look for both. And I would say our pipeline is probably 70% without portfolios, 30% with portfolios. And I think, you know, what we're doing is getting that muscle memory today about both, hey, existing portfolio companies, how much converts, and then how much do they sell post-mortem? And then, ultimately for people without portfolios, how fast can they ramp up their sales engine and how many units they can have? And in the fall at our, you know, investor day, we're going to give some, you know, our early learnings, you know, 12 months in of how that looks from a metric perspective so people can model it. Jake Roberge -- William Blair and Company-- Analyst OK, helpful. And then, benefit brokers, it sounds like those now drive nearly half of the bookings for you. Can you talk about how retention and multi-product adoption looks like for those types of logos? And is there any concern that the channel might be getting too large of a new booking source given you may not fully own the customer relationship? Or would you be happy to see that continue climbing? Raul Villar -- Chief Executive Officer Well, Jake, I love bookings, so I would definitely like more bookings from benefit brokers. No, we don't -- we own the client relationship. They essentially -- you know, it's a mutual relationship where they own the benefit side and we own the client side. But we end up owning the client relationship on the HCM side just like they own the client relationship on the benefit side. They've been a great partner. And, you know, we're going to continue to grow. I think 50% is, you know, pretty much a high watermark so far. And as we continue to grow the organization, we don't anticipate it being at 50%. You know, it should be somewhere between 30% and 40% longer term. But in the short term, Jake, we're going to take every booking dollar we can get from benefit brokers and be happy. Thank you. Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question. Kevin McVeigh -- Analyst Great. It looks like the midpoint of '25 is about 10% revenue growth as opposed to 19% in '24. Maybe this is for Adam. Adam, how much of that delta is rate versus kind of the environment as opposed to maybe conservatism or anything else? Is there any way to just dimensionalize in round percentages kind of the components of the deceleration? Adam Ante -- Chief Financial Officer Yeah. Hey, Kevin. Yeah. You're seeing a couple of points from the interest income, right? Interest income is likely to slow down and reverse in terms of total nominal dollars this year. So, you're seeing a little bit of pressure from that. And then, you're seeing a couple of points from the -- or about a point from the form filings change. And then, you're seeing some conservatism in it just based on where we are. At this point in the year, we're trying to be intentional, and we want to get back to sort of the philosophy that we've seen. And we're not expecting any contribution from the labor market still. So, we're still seeing the broader sort of macro sluggishness, and we wanted to be intentional about that heading out to this sort of longest point in our guide curve. Kevin McVeigh -- Analyst Got it. And just maybe just following up on that. How much of it -- I don't know if you have any impact of pricing in there. Adam Ante -- Chief Financial Officer Just in terms of how much pricing we would intend to continue to put in. I mean, I think we're going to see a balance between employee growth and PEPM growth. That is likely to persist, something sort of similar to what we've been experiencing, you know, here in '24. So, I think that you're going to see a mix that's probably closer to 50% or half and half, and that will then start to lend itself more to the employee side over time. But I think it's going to be consistent with where we've been for the last couple of years. Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question. Patrick Walravens -- Analyst Oh, great. Thank you. Raul, for you first, I want to talk a little bit more about sales productivity. You know, so many of the vendors in sort of the CRM area are talking about applying AI to increase sales efficiency and customer engagement. And then, Marc Benioff had an announcement about Agentforce that you might have seen yesterday. So, you guys have 600 reps. Are you actively using any sort of AI technologies to improve sales efficiency today? Is it working? Raul Villar -- Chief Executive Officer Yeah. So, I would say we're in the early innings. We use it a lot on the front end on the marketing side to create the best optimal demand. And we're able to point, you know, the prospects that are most likely to purchase from our demand to the sales rep. So, I would say that, you know, we're in the early innings, but we're pointing the best prospects most likely to purchase to our sellers. Patrick Walravens -- Analyst All right, cool. And then, Adam, for you, forgive me if I missed it, but if total revenue growth is 10% in '25, how do we think about recurring revenue? Adam Ante -- Chief Financial Officer Yeah. So, I mean, we gave a little bit of the breakdown on interest income specifically for the quarter. So, you know, we're guiding to about $12 million on the quarter, which implies a couple points faster growth on recurring for the quarter and then for the full year. So, $48 million to $50 million on the full year on interest income, which would put it at, again, a couple points faster in terms of recurring. Thank you. There are no further questions at this time. I'd like to pass the call back over to Raul for any closing remarks. Raul Villar -- Chief Executive Officer Thank you for your continued interest and support. We're optimistic about fiscal 2025 and remain confident in our ability to deliver attractive growth while accelerating margin expansion. We look forward to connecting with you at upcoming events, including the Stifel Tech Executive Summit in Deer Valley, the Goldman Sachs Communicopia & Technology Conference in San Francisco, and the HR Tech Conference in Las Vegas. Have a great night, everyone. Operator This concludes today's teleconference. [Operator signoff]

Paycor HCM, Inc. (PYCR) Q4 2024 Earnings Call Transcript

Rachel White - Vice President of Investor Relations Raul Villar Jr. - Chief Executive Officer Adam Ante - Chief Financial Officer Greetings, and welcome to the Paycor Fourth Quarter 2024 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Rachel White, Vice President of Investor Relations. Thank you, Rachel. You may begin. Rachel White Good afternoon, and welcome to Paycor's earnings call for the fourth quarter and fiscal year 2024, which ended on June 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 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. 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. Thank you, Rachel, and thank you all for joining us to discuss Paycor's fourth quarter and full year results. Our unique value proposition of empowering leaders to drive people and business performance continues to win in the market and helped drive revenue growth of 18% for the quarter. For the fiscal year, our team executed against our strategic growth initiatives, increasing the average number of employees on our platform by 9% and expanding the amount we earn per employee per month or PEPM by 6%, resulting in 19% revenue growth. We delivered significant adjusted operating income and free cash flow margin expansion this fiscal year while strategically investing in our platform and customer experience. Demand remains healthy as most employers are struggling with antiquated and incomplete HCM tools. Top of funnel metrics including leads and first time sales appointments increased significantly year-over-year, and our win rates remained elevated as our value proposition resonates in the market. We continue to focus marketing investments in sales hiring in the 50 largest cities in America, where we see the most opportunity. Our sales team grew 9% this year to 600 sales professionals, which increased our sales coverage in the 50 largest U.S. cities from 52% to 55%. Average tenure which drive seller productivity, increased 20% among our field sellers. A core component of our go-to-market strategy is developing and maintaining partnerships with key centers of influence. Benefit brokers help us identify employers that are dissatisfied with their legacy HCM tools and influence nearly half of our field bookings this year. Our mid market product, client experience and sales investments over the last few years continued to pay off as our average customer size and average deal size expanded for the third consecutive year. Since the IPO, the average size of our new mid-market customers increased 30%, helping to grow our average deal size by 55%. We are efficiently extending our distribution via the indirect embedded channel we announced earlier this fiscal year. Our strategic partners enhance their revenue per client and customer retention by offering a modern embedded HCM solution to their clients and prospects. In this past quarter, we continued converting our third partners portfolio and the three new partners we announced last quarter began selling. We also signed several new partners this quarter, tripling our indirect partners over the last year. Our team also continued expanding our award-winning HCM platform with valuable new capabilities for our customers. Our product investment remains focused on deepening our core platform, further enriching our talent solution and enhancing the connectivity of our platform. This year, we released technology that empowers leaders such as Pay benchmarking, Paycor Pass and labor forecasting and increase the value of our suite by $8 to $53. Within our core platform, we recently launched a new compensation management solution that streamlines budgeting and pay cycles and adds another $2 to our suite. Our collaborative tools foster alignment across teams, helping leaders ensure equitable and competitive compensation within budget while driving employee engagement. Revenue from our robust talent suite increased nearly 40% again this fiscal year, validating our unique value proposition of empowering leaders to coach, optimize and retain top talent to drive business results. Using our unrivaled talent tools, frontline leaders are improving employee engagement, which is increasing employee retention by 10% and helping drive better business outcomes. We also significantly advanced our interoperability strategy this year. According to Finch, half of HR professionals leveraged 7 or more employment systems, and most of these applications are not integrated, leading to errors and inefficiencies. API use on our platform increased approximately 300% this fiscal year, demonstrating growing demand to extend HCM software to other business applications. We provide customers unrivaled flexibility to seamlessly connect their data and systems, enabling leaders to automate time-consuming, error-prone manual tasks. We have 300-plus prebuilt integrations in our marketplace and made it easier to create custom integrations by increasing the number of API endpoints and our developer portal by more than 40% this fiscal year. The innovative developments we've made in our HCM platform continue to garner industry recognition. In May, Paycor won five Titan Business awards spanning HR, analytics, workforce management and talent. These tools empower leaders to connect and automate their back office, freeing them up to focus on what matters, building winning teams and driving business results. As we enter fiscal '25, we reflected on our strategy execution progress since the IPO. Over the last 3 years, we have grown revenue by over 85%, increased in adjusted operating income by over 130% and generated nearly $50 million more in free cash flow while expanding our sales capacity by greater than 60% and advancing our industry-leading HCM platform, growing our list PEPM by more than 50%. We have made tremendous progress and the opportunity before us is significant. On our path to $1 billion in revenue, we remain confident in our ability to deliver attractive growth while accelerating margin expansion. We believe there is a long runway to drive durable growth given the size of our market opportunity and the ongoing success we have had displacing legacy solutions which represents 75% of our bookings. Our go-to-market motion has strong momentum as we are staffed to deliver our fiscal '25 targets and encouraged by how sales tenure and retention are trending. We have significant room to drive leverage as we scale, and our top priorities are to drive sales efficiency and accelerate cash conversion. As such, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We will do that while continuing to invest in our strategic growth initiatives namely adding employees through sales expansion and increasing PEPM through product innovation. This progress wouldn't have been made possible without the efforts of our dedicated associates. I'd like to thank the team for their hard work and support in delivering these strong results. Now I'll turn the call over to Adam to discuss our financial results and guidance. Adam Ante Thanks, Raul. I'll discuss our fourth quarter and full year financial performance and then share our outlook for the first quarter and next fiscal year. As a reminder, my comments related to the financial measures are on a non-GAAP basis. We had another solid quarter, delivering total revenues of $165 million, an increase of 18% year-over-year. Recurring revenue grew 17% over the prior year. For the fiscal year, total revenues were $655 million, increasing 19% year-over-year. Our recurring revenue growth is primarily driven by expanding the number of employees on our platform and the amount we charge per employee per month. This quarter, employees grew 8% over the prior year, driven by new business wins with a modest contribution from labor market growth. Net revenue retention was 98% this year, in line with our expectations as the labor market growth moderated. In a typical macro environment, labor market growth contributes a point or two of our revenue growth. While the U.S. labor market growth moderated over the last 24 months from historical highs of 3 to 4 points of revenue contribution, now closer to 0, it has remained slightly positive. We finished this quarter with approximately 30,500 customers, utilizing our platform to help coach, optimize and retain nearly 2.7 million employees. We continue to see our average customer size and average deal size increase as we continue to move upmarket, demonstrating the success of our product and service investments. Similar to last year, mid market customers represented 80% of our portfolio, with enterprise contributing 15% and the micro segment of under 10 employees contributing just 5% of revenue. Effective PEPM increased 8% year-over-year to nearly $19 this quarter. Excluding embedded HCM deals, effective PEPM increased 10%, fueled by expansion of our product suite. The growth in effective PEPM is attributable to cross sales, pricing initiatives and higher bundle attach rates, and talent has consistently demonstrated strong attach rates and cross-selling traction. Our Embedded HCM channel continued to ramp and contributed 2 points of employee growth again this quarter. We have increasing demand from partners and our pipeline grew sequentially for the fourth consecutive quarter. Although we are pleased with the progress and expect to at least double our embedded revenue in fiscal '25, it will take some time before it materially impacts our revenue. We continue to invest to scale and capitalize on this opportunity by expanding our capacity, our offering and sales enablement tools to drive mutual success. This quarter, we generated $14 million of interest income on average client funds of approximately $1.2 billion, an effective rate up 490 basis points. In addition to achieving consistent top line growth, we have continuously expanded operating margins on an annual basis. Adjusted gross profit margin, excluding depreciation and amortization, was 79% for the quarter and year. This quarter, it decreased by 40 basis points over the prior year due to macro headwinds, however, expanded by 40 basis points for the full year. This quarter, sales and marketing expense was $51 million or 31% of revenue, down nearly 300 basis points from a year ago, largely driven by more moderated sales headcount growth and our focus on efficiency and scale. For the year, sales and marketing expense was $198 million or 30.2% of revenue, an improvement of 160 basis points year-over-year. On a gross basis, we invested $25 million or 15% of revenue in R&D this quarter to continue differentiating our HCM suite and expanding our PEPM opportunity. We all invested 15% of revenue in R&D for the year. similar to prior years and in line with our long-term targets. As we scale the business, we have consistently driven leverage in G&A. G&A expense was $20 million or 12.1% of revenue this quarter, an improvement of 280 basis points from last year. On the full year, we achieved 150 basis points of leverage from G&A. Quarterly adjusted operating income increased over 60% to $25 million with margins of 15.2%, up 420 basis points from 11% last year. For the full year, adjusted operating income rose 36% to $112 million, up 215 basis points while differentiating our service and solution. During the quarter, we generated $37 million of adjusted free cash flow at 23% margin, up nearly 9 points. For the full year, we generated $40 million or 6% margin, an improvement of 430 basis points. Free cash flow margins expanded at twice the rate of adjusted operating income margins as we scale the business and continue to focus on efficiency. We ended the year with $118 million in cash and no debt. In addition, our stock-based compensation expense decreased year-over-year to less than 10% of revenue with less than 1% share dilution. Entering fiscal '25, our top priorities are to drive sales efficiency and accelerate cash conversion. While growth remains our top priority, we believe a more balanced approach to profitability will maximize shareholder value. As Raul mentioned, we are introducing a new long-term adjusted free cash flow margin target of greater than 20%. We plan to achieve this by balancing sales headcount growth with sales productivity to improve go-to-market efficiency and continuing to drive leverage in G&A as we scale. Similar to the dynamics this year, we expect adjusted free cash flow margins to continue expanding at roughly twice the pace of adjusted operating income margins. Our outlook for fiscal '25 remains positive based on a healthy demand environment and opportunity to drive continued PEPM expansion. However, our guidance does reflect a fluid macro backdrop, including labor market headwinds and a declining rate environment and, of course, some conservatism at this point in the year. For the first quarter, we expect total revenues of between $161 million and $163 million or 14% growth at the high end of the range, which includes $12 million of interest income on average client funds balances of just over $1 billion. And adjusted operating income is expected to be between $17.5 million and $18.5 million. For the full year, we expect total revenues of $722 million to $729 million or 11% growth at the top end of the range. including $48 million to $50 million of interest income, which contemplates up to 200 basis points of rate cuts over the next fiscal year. And we expect adjusted operating income of $123 million to $126 million. On a recurring basis, that implies more than 100 basis points improvement in adjusted operating income margins. In summary, we remain optimistic about our opportunity in HCM. Demand remains healthy for our innovative HCM solution that empowers leaders to unlock the potential of their people and business performance. Our solution is mission-critical to attracting, paying and retaining great talent. We are confident in our strategy and focused on executing a proven go-to-market playbook to deliver greater sales efficiency and free cash flow margins. With that, we will open the call for questions. Operator? [Operator Instructions] Thank you. Our first question comes from the line of Terry Tillman with Truist Securities. Please proceed with your question. Terry Tillman Yes. Hey, there Raul, Adam and Rachel. Hopefully, you can hear me okay. I had a question and a follow-up per instructions. The first question is just on maybe, Raul, kind of ending the year looking for a strong finish in bookings, how did -- what's the report card on the enterprise segment, which you've been excited about those 1,000 plus employee businesses? And then mid market, what was the bookings like versus your expectations? And the second part of that first question is I heard something about conservatism. Are you assuming kind of a slower kind of close rates? Or what are you assuming around bookings activity in both of those key segments? And then I had a follow-up for Adam. Raul Villar Jr. Yes, the bookings -- thanks, Terry. The bookings for the quarter were really consistent, and we are well-positioned to deliver our FY '25 guidance, and we feel good about the trajectory of the organization. Terry Tillman Okay. And then maybe just a follow-up, it's interesting in terms of the -- a bunch of commentary on free cash flow progression, an acceleration and then that 20% target. Adam, I was hoping maybe we could unpack a little bit more just any guardrails in terms of duration, the size of the business to get to that target? And is there anything more notable on G&A or sales and marketing leverage to get there as well? Just a little bit more hopefully to unpack on when you get to that, what that would look like in terms of some of those dynamics? Thank you. Adam Ante Yes. Hey, Terry. Yes. I mean no explicit time frame other than sort of medium to long-term as we think about our continued progression. There's not going to be any sort of structural pops that are going to get us to 20%. I think it's going to be continued expansion. And this year, clearly, it looks like we're on that sort of inflection point as you think about continuing to expand and driving faster free cash flow conversion. So I think that trajectory makes sense for us. And in terms of like getting there, I think you're going to see it, of course, across the board, there's still opportunity across G&A over time, we think that there's some further opportunity across R&D and gross margin. But I think the majority we're going to see the real difference is going to come out of the cost of acquisition. So between our implementation and our go-to-market teams, it's really around leveraging investment. And we're starting to drive some of that efficiency now. So you're seeing some of that show up. But we have probably 8 to 10 plus more points to go over the next couple of years that I think will be a big contributor to free cash flow margins. Thank you. Our next question comes from the line of Gabriela Borges with Goldman Sachs. Please proceed with your question. Gabriela Borges Hi, good afternoon. Thank you. I'll ask Terry's question on the long-term free cash flow margins in a slightly different way. Raul and Adam, we've spoken before about your conviction in Paycor being a 20% plus growth company. Do you aim for being a rule of 40 company when delivering 20% plus free fair cash flow margin? Meaning, how do you think about the long-term normalized profile of revenue growth given some of the changes in the sales and marketing and some of the newer options like embedded finance that you've talked about in the last couple of quarters? Adam Ante Yes. Hey, Gabriela, yes, we feel still really good about the opportunity. I mean the market, it continues to be huge. We see a huge opportunity. We're well-positioned in the product we see some sluggishness right now in the macro that is going to make that harder, clearly didn't achieve the target here in this last year. But we've been actually really consistent and close to the 20% growth over the last couple of years on a recurring basis. So it's still our long-term target. And I do think that -- we think that it requires some labor market growth. It's going to require a little bit stronger macro than where we are. But nothing structurally is in the way from us continuing to grow and achieve that to your point, sort of the rule of 40 on both the revenue and free cash flow target. So I think we're going to balance that in. We are going to lean into the productivity right now. We'll make sure we're set up from a sales perspective, and we feel good about that setup into '25. And as we think about long term, we are not coming off of what we see in the market opportunity. And again, our product is so well-positioned right now. We feel really good about that over the long-term. Gabriela Borges That makes sense. And I'll ask a follow-up on the near-term. Talk to us a little bit about how you're feeling about your ability to retrain, train and enable the salespeople. You mentioned that bookings have come in nicely towards the end of the year. So give us a status update on how the churn and the sales growth is trending in how many sales counts ads do you expect? Or how much do you expect to grow sales count capacity in fiscal year '25? Thanks. Raul Villar Jr. Yes. Thanks, Gabriela. I think in Q4, retention improved, and we feel that the territory redesign was well executed and well received. And we are looking at our sales capacity, and we feel like we have plenty of capacity to achieve our FY '25 targets. And obviously, to Adam's earlier point, we'll balance in more sales hiring as the macro gets better, but we feel well-positioned today, both from a tenure perspective and a capacity perspective to achieve our targets. Thank you. Our next question comes from the line of Siti Panigrahi with Mizuho. Please proceed with your question. Siti Panigrahi Hi. Thanks for taking my questions. Very good execution in this tough market. So Raul, my question is, when you -- I understand the sluggishness you talked about maybe that's impacting the new logo acquisition. But what are you seeing in terms of customer and cross-selling your new products to the customer base I know you have been expanding the product footprint and efficiently additive in compensation. How should we think about the effective PEPM growth this year? What's the adjunction in your guidance? Adam Ante Yes. Hey, Siti, I mean, what we saw in Q4 was actually some slight acceleration, which was actually a little bit overweighted from some of the cross-sell opportunities. So we saw a little bit more success here in Q4. And I think as we go forward, we are really expecting to see a little bit less PEPM growth, a little bit less PEPM expansion as we add more in the enterprise space as we add more in these embedded partners. We're going to see the PEPM slowdown and really lever into the employee growth. But I think actually, in this quarter and maybe in the near-term, you might see a little bit more of that balance in the PEPM expansion as we've seen some success on the cross-sell side, pick up even a little bit further. So we're seeing good attach rates, good success like we called out earlier on the talent and that progresses or that continues. Siti Panigrahi Yes. And then a follow-up to that embedded HCM. I know it's been a few quarters since you launched. So how is the progress so far? And what kind of traction are you seeing among your partner base and even through their customer? Adam Ante Yes. So the traction has been really strong. I mean we announced it in Q1, we've seen continued growth in the pipeline each quarter. We've tripled the number of partners that we've added this year. We continue to go through the migration of some of our larger partners well. And so it's becoming a -- it's really gaining traction. It's still a relatively small portion of the overall portfolio, 0.5 -- less than 0.5 point of the revenue here in '24. We think we'll double that into 25 million but there's a lot more room to grow and continue to overall meaningfully impact our revenue over the long-term. So we're still really optimistic about this channel and its long-term potential. Thank you. Our next question comes from the line of Samad Samana with Jefferies. Please proceed with your question. Samad Samana Hi good evening. Thanks for taking my question. Maybe first, just as a follow-up on the embedded side to Siti's question. On your comment that you expect embedded revenue to double in fiscal '25 and you're kind of, no pun intended, embedding that in your guidance. How should we think about that between you adding additional ISVs that will embed the software versus growth of the existing partners that you've already inked and what you foresee in terms of their ramp? And can you just remind us how those contracts work? Are there any guaranteed minimums? Just anything that helps us kind of get a view on the visibility that you have there? Adam Ante Yes. Hey, Samad, We wouldn't include new partnerships that we haven't signed necessarily inside of our guidance. So all of the revenue is really going to be -- and the expectation is going to be from partners that already exist. And those partners, of course, include their existing portfolios and new business that they're signing as we think about what's reasonable is what we would include in our guidance going into '25. In terms of the structure of those deals, there are some that have minimums for sure. We try to balance those in as -- depending on sort of the size and the need of the portfolios and how much needs to come over and how much work we need to do to necessitate it but we do have structures that may include some minimums. Most of it is really based on more of the usage and how much business our partners are adding to the platform now. Samad Samana Understood. And then Raul, maybe just a question for you. In terms of upmarket success, you guys continue to call that out. It's been increasing in the mix. And I know you've talked about some changes in the sales organization. How should we think about how the sales organization's composition looks today and how well it's kind of prepared to attack that larger customer opportunity? And as you think about fiscal '25, is there a different type of reps that you're gaming to hire? Or is there a different type of training program to target those larger, more sophisticated customers? Raul Villar Jr. Yes. Samad, thanks. From a training perspective, obviously, we continually enhance our training to meet the different needs of the different segments that we have. So we are continuing to do that. And the way to think about it's a third of our organization is pointed at that 500-plus segment and the 2/3 are pointed below. And we think that's a really good optimal mix for us today. And we are seeing the benefits of our platform really pulling us up market. And now we are pointing really qualified tenured our best of the best Navy Seals type of reps against those opportunities, and so we're seeing success there. Thank you. Our next question comes from the line of Scott Berg with Needham & Company. Please proceed with your question. Scott Berg Hi, everyone. nice quarter. And thanks for taking my questions here. Raul, I wanted to see if you can help us reconcile your view on the market versus other competitors, both public and private that talk about maybe a little bit more of a slowing market than you all talked about. You described really healthy sales and pipelines and what you thought was a pretty robust market. But maybe you can help us dissect why your view seems to be at least marginally different than others in the space? Raul Villar Jr. Yes. I mean when we look at the market and our platform and our position in the market, we just look at the key components of first appointments, deals that are in process, the velocity of the transactions. And when we look at it, we think what, the market pretty strong. And we finished the year with 16% recurring revenue growth. And without headwinds, we would have been close to 20%. And so we still feel like it's a big macro market with 75% plus of the opportunity on what we would consider legacy antiquated incomplete solutions. And we have a great product, modern robust with some great tools that's really attractive. So for us, it's just about execution and continuing to execute, and we see the market really strong and robust. And some of it could be, Scott, the size of Paycor compared to others. But outside of that, we think the market is really big and still in the early innings of transformation. Samad Samana Understood. Helpful. And then, Adam, in your guidance, you talked about 200 basis points of rate cuts for the year. You view that certainly on the conservative side relative to what we are seeing out there today, which is probably appropriate. But how should we view usage at existing customers? You talked about how that went from a nice tailwind to more of a flat metric year-over-year. But how are you thinking about C-counts in the guidance? Raul Villar Jr. Yes. Scott, we intentionally didn't include any incremental labor market growth in our guidance. So we're effectively assuming a flat labor market contribution similar to what we saw in '23. So there might be a slight headwind '23 to '24, but there wasn't much contribution in '23, and we're assuming the same thing here into '24 -- excuse me, '24 into '25 now. Thanks, Scott. Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Please proceed with your question. Brian Peterson Thanks for taking the questions. So the top of funnel comment sounded really encouraging as you close out the year. Did that actually improve? Or was that above your expectations for the fiscal fourth quarter versus what you saw earlier in the year? Any way to unpack that a bit? Raul Villar Jr. Yes. I mean it's been fairly consistent throughout the year. And so for us, it's been how can we continue to execute against the opportunities. And it was slightly elevated in the fourth quarter, but I would say all in all, pretty consistent throughout the year. Brian Peterson And any changes to the share owners that you guys are saying, we hit on some of the regional players and some of the legacy players. But anything in terms of the new business you're bringing on, has that mix changed at all over the course of the year? Raul Villar Jr. I mean it changes slightly, 75% of our bookings are still what we would consider from legacy incumbent in-house, regional ADP, Paychex. It moves around quarter-to-quarter a little bit. And in the quarter, we had a little bit more contribution from ADP and Paychex than previous quarters. Thank you. Our next question comes from the line of Jared Levine with TD Cowen. Please proceed with your question. Jared Levine Thank you. Can you discuss how gross revenue retention changed during your -- your thoughts were consistent. Were there any underlying changes based on employer size segment or controllable versus uncontrollable churn? Adam Ante Hey, Jared, yes, no, I mean it's been fairly consistent. It does pop around. You see like a little bit more pressure on the smaller end of the market, for sure. And we have seen a little bit more success in the enterprise space. But overall, I think actually, the labor market growth really impacted it more than anything. So you saw it tick down a couple of points, which again was really all of that labor market slowness that we saw relative to last year. But fairly consistent otherwise and what you would expect given some of the comments around upmarket success in the enterprise and the softness on the smaller end of the space. Jared Levine Got it. Thank you. And then in terms of ERTC, can you update us if there was any of that revenue in 4Q and then the headwinds that represented? And or any assumed and what the headwind assumed for '25 is? Adam Ante Yes. It was effectively immaterial in Q4. We anticipated it in the guidance to come out, and so it was immaterial in -- excuse me, in Q4. And we are not including anything in our guidance for ERTC for '25. So it will be about 1.5 point headwind relative to '24, just as that's completely gone excuse me, about 1 point, excuse me, of headwind. Thank you. Our next question comes from the line of Bhavin Shah with Deutsche Bank. Please proceed with your question. Bhavin Shah Thanks for taking my questions. Raul, just one clarification. Kind of you talked about earlier about feeling good about the level of sales capacity is today. And I just want to just clarify that kind of means no new net hires until the macro improves. Is that the right way to read it? Raul Villar Jr. No, we are fully staffed for FY '25. And we'll continue to add throughout the year. We have a plan to continue to add. But will either increase or decrease that based on market conditions. So we are going to be flexible to make sure that we're investing properly in that area. Adam Ante Bhavin just to be clear, we are going to increase capacity through both sales hiring and productivity as we're thinking about growing into '25. So we'll continue to grow from where we are today. Bhavin Shah Perfect. Thanks for the clarification. And kind of circling back on the embedded opportunity, can you just provide a little bit more insight in terms of some of the recent signings or kind of what you have in the pipeline today in terms of like the demographics of these customers? Are they still a profile from what you have already in the platform? Do you have the existing businesses that you can migrate over? Just any other insight would be appreciated. Adam Ante Yes, for sure. I mean, so we are really excited about some of the new partnerships that we've been able to sign. Some of them are a little bit different in terms of like payroll service bureau style partners, but then some more vertical software specific like ERPs and POS-type fintech companies. So I think that there's some continued success that we are seeing building off of what we've already shared. So I think that you're going to continue to see that vertical-specific workforce management, and softwares within the ERP space as well. So we're excited about those. They're a little bit smaller than -- some of those partners are a little bit smaller than some of the earlier partnerships that we've signed that have quite a few more employees and portfolio sizes. And so I think that will be a balance in as we continue to progress, not all of them are going to have large portfolios. So we'll balance that. And it will probably be a little bit choppy just in terms of the types of partners that we bring in over the next year as we continue to scale this up. But the pipeline itself continues to grow with those similar type partners. Thank you. Our next question comes from the line of Mark Marcon with Baird. Please proceed with your question. Mark Marcon Good afternoon and nice quarter. Wondering if you can talk a little bit more about some of the new modules. I mean, you've obviously had great traction with your applicant tracking solution. I'm wondering how much further you can penetrate the existing client base? And if you can talk a little bit about the newer models that you've come out with in terms of employee compensation and how that ends up fitting in? And then I had some follow-up questions with regards to the inside sales force. Raul Villar Jr. Yes. Hey, Mark, it's Raul. We have a tremendous amount of white space available to continue to cross-sell. The majority of the PEPM expansion has happened over the last 5 years. And obviously, we have a large client base that we can continue to cross-sell in. And we continue to invest and grow our cross-selling team, and we saw some of that success in our fourth quarter over performance. And so that was nice to see. And we'll continue to do that. Obviously, talent is really significant. It's a broad portfolio, both attraction and retention. And we're continuing to press on the talent solution. From a compensation perspective, giving frontline leaders the ability to equitably provide compensation increases across our teams and an equitable, fair and within budget really just enables a frontline leader to be more effective during that process. And so we think that fits right into our leader, strategy and really helping empower frontline leaders to build winning teams. Mark Marcon Can you talk a little bit about the size of the internal sales force that's cross-selling into the existing base? And where does that stand relative to the total of 600? And how big could that become? Because it seems -- I mean, particularly on talent, it's a great solution. Raul Villar Jr. Yes. I mean we're still -- as you know, we're still focused more on new. By and large, the majority of our assets are pointed at hunting new clients. However, about 10% of our organization is focused on cross-selling, and that's been growing year-over-year. And I think you'll continue to see us press in there because there is such a big white space opportunity. Thank you. Our next question comes from the line of Mark Murphy with JPMorgan. Please proceed with your question. Arti Vula Hey, this is Arti Vula on for Mark Murphy. Congrats on the quarter and thanks for taking the question. A quick one, just any divergences to call out in terms of demand patterns by customers in terms of geography or end market or any other relevant to mention? Raul Villar Jr. No, the Demand has been really consistent by size, by market, by industries. We haven't seen any significant changes from that perspective, Arti. Arti Vula Thanks. And then looking at your slide deck, you have -- you kind of reached sales force coverage among the top 50 metros to about 55%. And then now 52% last year and 44% the year before that. Is there a framework of how we should think about that going forward in FY '25, whether that will accelerate or not? How that fits into the fact that you're kind of fully staffed to deliver on your targets -- FY '25 targets now? Thanks. Raul Villar Jr. Yes. Arti, we are going to continue to increase coverage throughout the year. I wouldn't expect dramatic coverage enhancement. I would say that we'll continue to add heads. As I said earlier, we're trying to be intentional about headcount acceleration and leveraging the capacity of our existing sales organization. While we continue to add reps in each of those 50 markets where appropriate. So we'll continue to grow, and that number will be higher this time next year. Thank you. Our next question comes from the line of Steve Enders with Citi. Please proceed with your question. Steve Enders Great. Thanks for taking the questions here. I guess maybe just following up on the last point of the top 50 sales coverage, and it seems like it's a bit of a shift away from the prior Tier 1 coverage number that you've previously kind of reported on, I guess. What's kind of driving that shift? And I guess what does that maybe signal at how you're thinking about that opportunity there? Raul Villar Jr. Yes. Steve, how are you? It's Raul. It really isn't a shift or a change in strategy. We've always been focused on the 50. We were extremely barren in the top 15 or the Tier 1, and we've continued to move that percentage up. And as we look at continued ongoing seller growth, we will continue to add in all 50 markets over time. It just will be based on opportunity and finding the right person and having the right opportunity available for that person. So I don't think it's a change in strategy. We still love the top 50 cities. We are going to continue to add headcount in all fit markets. And that's what comprises where our 600 sellers sit today. And so we just felt like it was more directional for everyone to understand the top 50 cities and where we sit from that perspective. Steve Enders Okay. Got you. That's helpful. And then I guess just on the free cash flow side, I mean, pretty -- looks like pretty solid performance here in the quarter. I guess anything to call out that helped kind of add to that performing tier and I guess, anything that seems it pulled forward or maybe there's some like timing shifts in there? But just I guess, what is that kind of indicated as well for fiscal '25 and the free cash flow dimensions there? Adam Ante Yes. I mean, clearly, on the quarters, there's quite a bit of net working capital changes. So like within the year, it's a little bit harder to look at, but we're trying to manage this to the full year. So I think that dynamic of the expansion on the full year is really important. But to smooth out those net working capital items over time. The primary driver of the free cash flow benefit is still the overall expansion and productivity that we're getting out of the cost of acquisition in this case in this year. And we are seeing the same thing out of G&A. So most of it is driven by the operating and within the quarters, you have of those net working capital items. Our next question comes from the line of Daniel Jester with BMO Capital Markets. Please proceed with your question. Daniel Jester Great. [Indiscernible] everyone. Thanks for taking my question. Maybe we could spend a moment when you talked about the mix of bookings, 25% come from other solutions which are modern or new. Can you just remind us like why does Paycor win in those circumstances? It's clear relative to the legacies, but relative to the more modern solutions, why are you winning? Raul Villar Jr. Yes. I mean I think strength of the platform, most open platform, most robust platform and our win rates are up and our share and winning from modern cloud competitors continues to increase and reach a high in FY '24 as a percentage of the mix. So we feel really well-positioned to compete against legacy and especially to compete against modern. It's a really deep platform. We offer the most PEPM, which in theory ties to feature functionality. So ultimately, we have the most robust platform. We have the most modern platform, it's the most open platform, and that's why we're winning. Daniel Jester Okay. Thank you for that. And then, Adam, maybe I missed this in the prepared remarks. But can you remind us what's going on with gross profit margins? It looks like they were down year-over-year. Is there anything that you'd call out there? Thanks. Raul Villar Jr. Yes. Hey, Dan. The primary drag in that case was really the form filings just sort of pressure that we saw coming out. We actually saw some really good underlying operating expansion, margin expansion apart from those, and we'll continue to press to that for '25. There's a little bit more margin pressure that we'll see from that high margin form filings revenue that's going to -- the rest of that, that's going to leave here in '25, but we'll work through that this year and be able to show continued expansion. Thank you. Our next question comes from the line of Matt VanVliet with BTIG. Please proceed with your question. Matt VanVliet Hey, good afternoon. Thanks for taking the question. I guess when you look at some of the additional modules and the attach rates you're seeing and some of the momentum behind that, where do you feel like you're looking to put the most behind the R&D budget? And so much as you look at M&A, are there areas of the portfolio that you think are sort of prime to add additional capabilities as you've seen demand for the attachment there? Raul Villar Jr. Yes. I mean -- hey, Matt. Thanks. It's Raul. I think we think about our R&D investment in three big buckets; continuing to enhance our core platform, obviously, continuing to deepen our talent solutions, which are best-in-class already, and then continuing to make it the most open platform in the category. And those are the 3 areas where we continue to invest in, and we feel really good about it. From an M&A perspective, there's no one area or one gap in the platform that we're looking to fill. I would say there's hundreds, if not thousands of cottage categories that kind of surround the HCM ecosystem that we're always looking to evaluate. And so that's an ongoing process. We're always looking for great solutions that can help our leaders build winning teams. Matthew VanVliet All right. Very helpful. And then as you look at auto success across software seems to be in verticalizing your offering to make it a little more market-ready, you've talked a lot about embedded solutions and some of your partners, but how might you be able to use AI and maybe specifically GenAI around the talent and training side of it as well as employee engagement to really help broaden the verticalization of your product to be a little more out of the box ready? Adam Ante Yes. Hey, Matt, I mean, actually, the AI that we're driving now, the majority of where you're seeing it show up is inside the talent solution and inside the talent suite. There's a lot of sentiment capability like the job description generator sort of sort of functionality. So there's a lot of functionality around that, talent attraction and recruiting. And then we'll continue to look for those opportunities -- not just look for those opportunities, but building those opportunities around some of the more sort of proactive nudging, as folks are working through their workflows inside of the system and making those workflows easier to navigate, so that the clients don't have to spend quite as much time inside of there, and they can focus on more of the leader and performance management tasks that are more critical to the organization. And we're looking at some of that in and again sorry, not even just looking at it but working through some of the GenAI type chat functionality that we think are going to be really additive for our customers as well. Thank you. Our next question comes from the line of Jake Roberge with William Blair. Please proceed with your question. Jake Roberge Yes. Thanks for taking the questions. I just wanted to follow-up on the embedded strategy. When you look at the pipeline of new partners, are they primarily ones with an existing portfolio? Or are you looking at partners that are more on the sourcing side as well? And then have there been any learnings for that motion now that you've been able to onboard the first few partners throughout this year? Raul Villar Jr. Yes. Hi, Jake, it's Raul. I think, obviously, the portfolio will be a mix. There are more embedded candidates without portfolios and with portfolios. Obviously, we look for both. And I would say our pipeline is probably 70% with our portfolio, 30% with portfolios. And I think what we are doing is getting that muscle memory today both, hey, existing portfolio companies how much converts and then how much they sell postmortem. And then ultimately, for people without portfolios, how fast can they ramp up their sales engine and how many units they can have. And in the fall at our Investor Day, we're going to give some -- our early learnings, 12 months in of how that looks from a metric perspective, so people can model it. Jake Roberge Okay. Helpful. And then benefits for brokers, it sounds like those now drive nearly half of the bookings for you. Can you talk about how retention and multiproduct adoption looks like for those types of logos? And is there any concern that channel might be getting too large of a new booking source given you may not fully own the customer relationship? Or would you be happy to see that continue climbing? Raul Villar Jr. Well, Jake, I love bookings. So I would definitely like more bookings from benefit brokers. No, we don't -- we own the client relationship. They essentially -- it's a mutual relationship where they own the benefit side and we own the client side. But we end up owning the client relationship on the HCM side, just like they own the client relationship on the benefit side. They've been a great partner and we are going to continue to grow. And I think 50% is what we -- it's pretty much a high watermark so far. And as we continue to grow the organization, we don't anticipate it being at 50%, it should be somewhere between 30% and 40% longer term. But in the short-term, Jake, we are going to take every booking dollar we can get from benefit brokers and be happy. Thank you. Thank you. Our next question comes from the line of Kevin McVeigh with UBS. Please proceed with your question. Kevin McVeigh Great. It looks like the midpoint at '25is about 10% revenue growth as opposed to 19% in '24. Maybe this is for Adam. Adam, how much of that delta is rate versus kind of the environment as opposed to maybe conservatism or anything else? Is there any way to just dimensionalize in round percentages kind of the components of the deceleration? Adam Ante Yes. Hey, Kevin. Yes, you're seeing a couple of points from the interest income, right? Interest income is likely to slow down and reverse in terms of total nominal dollars this year. So you're seeing a little bit of pressure from that. And then you're seeing a couple of points from the -- or about 1 point from the form filings change. And then you're seeing some conservatism. I mean just based on where we are at this point in the year, we are trying to be intentional, and we want to get back to the sort of the philosophy that we we've seen, and we are not expecting any contribution from the labor market still. So we are still seeing the broader sort of macro sluggishness and we wanted to be intentional about that heading out to this sort of longest point in our guide curve. Kevin McVeigh Got it. And just maybe just following up on that. How much of it -- I don't know if you have any impact of pricing in there? Adam Ante Just in terms of how much pricing we would intend to continue to put in. I mean, I think we're going to see a balance between employee growth and PEPM growth that is likely to persist something sort of similar to what we've been experiencing here in '24. So I think that you're going to see a mix that's probably closer to 50%, 50% or half and half. and that we'll then start to lend itself more to the employee side over time. But I think it's going to be consistent with where we've been for the last couple of years. Thank you. Our next question comes from the line of Patrick Walravens with Citizens JMP. Please proceed with your question. Patrick Walravens Great. Thank you. Raul, for you first. I want to talk a little bit more about sales productivity. So many of the vendors in sort of the CRM area are talking about applying AI to increased sales efficiency and customer engagement. And then [indiscernible] had an announcement about agent force that you might have seen yesterday. So you guys have 600 reps. Are you actively using any sort of AI technologies to improve sales efficiency today? Is it working? Raul Villar Jr. Yes. So I would say we are in the early innings. We use it a lot on the front end on the marketing side to create the best optimal demand and we're able to point the prospects that are most likely to purchase from our demand to the sales reps. So I would say that we are in the early innings, but we're pointing the best prospects, most likely to purchase to our sellers. Patrick Walravens All right. Cool. And then, Adam, for you, forgive me if I missed it. But if total revenue growth is 10% in '25, how do we think about recurring revenue? Adam Ante Yes. So I mean, we gave a little bit of the breakdown on interest income specifically for the quarter. So we are guiding to about $12 million in the quarter, which implies a couple of points faster growth on recurring for the quarter and then for the full year. So $48 million to $50 million on the full year on interest income, which would put it at again a couple of points faster in terms of our recurring. We broke all that for you. Thank you. There are no further questions at this time. I'd like to pass the call back over to Raul for any closing remarks. Raul Villar Jr. Thank you for your continued interest and support. We are optimistic about fiscal 2025 and remain confident in our ability to deliver attractive growth while accelerating margin expansion. We look forward to connecting with you at upcoming events, including the Stifel Tech Executive Summit in Deer Valley; the Goldman Sachs Communacopia and Technology Conference in San Francisco in the HR Tech Conference in Las Vegas. Have a great night, everyone. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Globant S.A. (GLOB) Q2 2024 Earnings Call Transcript

Tien-Tsin Huang - JP Morgan Jim Schneider - Goldman Sachs Maggie Nolan - William Blair Bryan Bergin - TD Cowen Jason Kupferberg - Bank of America Jonathan Lee - Guggenheim Divya Goyal - Scotiabank Arvind Ramnani - Piper Sandler Sean Kennedy - Mizuho Surinder Thind - Jefferies Leonardo Olmos - UBS Thiago Kapulskis - Itau Good day and welcome to Globant's Second Quarter 2024 Earnings Conference Call. I am Arturo Langa, Investor Relations Officer at Globant. All participants on this call will be on listen-only mode. After today's presentation, there will be an opportunity to ask questions. Kindly refrain from raising hands, as we'll aim to address a select number of questions to assure efficiency. Please note this event is being recorded and streamed live on YouTube. By now, you should have received a copy of the earnings release. If you have not, a copy is available on our website, investors.globant.com. Our speakers today are Martin Migoya, Co-Founder and Chief Executive Officer; Juan Urthiague, Chief Financial Officer; Patricia Pomies, Chief Operating Officer; and Diego Tartara, Global Chief Technology Officer. Before we begin, I would like to remind you that some of the comments on our call today may be deemed forward-looking statements. This includes our business and financial outlook and the answers to some of your questions. Such statements are subject to the risks and uncertainties as described in the company's earnings release and other filings with the SEC. Please note that we follow IFRS accounting rules in our financial statements. During our call today, we will report non-IFRS or adjusted measures, which is how we track performance internally and the easiest way to compare Globant to our peers in the industry. You will find a reconciliation of IFRS and non-IFRS measures at the end of the press release we published on our Investor Relations website announcing this quarter's results. I'd now like to turn the call over to Martin Migoya, our CEO. Martin Migoya Good afternoon everyone. It is my pleasure to be back with you. Hey, how are you, Digital Martin? Thank you so much. Enjoy your holidays. I will take it from here. Good afternoon, everyone. It's my pleasure to be back with you again. I'm giving a well-deserved break to my digital twin, And this quarter, we are changing the format of our earnings call. We will be more concise in our remarks and leave more time for discussion with our analyst community. Globant remains committed to our long term growth. We continue expanding our market share at this important time for our industry. We aim to be the leading innovation partner for our customers as AI revolution continues to expand. I will begin with our quarterly results. Q2 revenue totaled $587.5 million, up 18.1% year-over-year, and almost 3% quarter-over-quarter. This growth was shared across the geographical regions and industry verticals where we work. It included a significant step forward with our top customers and our media, sports and entertainment vertical. We continue to deliver in profitability, forecasting EPS growth while maintaining a healthy balance sheet. We're improving our margin outlook for the year, raising both our adjusted operating income and our adjusted EPS. While returns and profitability have eroded across the IT services industry in recent years, Globant sustained them while delivering industry-leading growth. This quarter also marks a special milestone for us. We have reached our 10th anniversary as a public company. Since our IPO we have delivered over 1800% in shareholder returns and 15 times revenue growth at a compound annual growth rate of 29.6%. This was made possible through our always in better mindset. Our digitally native and entrepreneurial culture empower us to build long lasting relationships with our clients. Over the short and medium term, generative AI presents us with a massive opportunity. We haven't seen this scale since the smartphone revolution in the late 2000s. Back then, users demanded new apps to interact with their preferred brands. Companies everywhere reacted to meet consumers demand and kick off multi-year digital transformation programs, many of which are ongoing today. Currently, we see Gen.AI tools quickly being adopted by users. The barrier to entry for building AI has been lowered, but creating enterprise class solutions that are effective beyond a demo remains a challenge for the industry. Generative AI has brought significant gains in productivity and efficiency of development. However, history has shown us that after every massive tech breakthrough, users demand more from the brands they love. This pushes companies to go further. The scope of their ambition increases and they need to create the expected AI-based experiences that the users demand. Many of those were impossible before and they will trigger the next generation of projects and programs. We firmly believe that the net effect between these dynamics foster a positive future for our industry. At Globant, we acknowledge this, and we are ready to adapt and win. AI-related revenues are growing close to 130% in the first half of 2024 versus the same period last year. During the first half of this year, we have produced over $150 million of revenue that included AI workloads, far above the $100 million in revenues that we reported in November last year. This quarter, Globant also presented its own AI agents to enhance the software development lifecycle. Having invested 4 years in our range of AI platforms, which include Algar, Magnify, Navigate, GeneXus, they now form the backbone of our new AI agents. Augmented and supervised by humans, the agents will accelerate each stage of the development process, including product definition, backend prototyping, design, code testing, and code fixing. They will assist from designing individual tasks and interactions to understanding users' goals and crafting experiences that seamlessly guide them towards the desired outcomes. We are also keen to announce our growth in the marketing technology space. At the Cannes Lions International Festival of Creativity, this summer, Globant presented our new Globant GUT network. It combines our previously acquired advertising organizations with GUT, the award-winning global creative agency. The new network offers a one-stop shop for marketers, leveraging the best of global creativity, media, and technology. I'm also pleased to announce that IDC recognized Globant as a leader in the latest market scape for the media industry. I'm excited to invite you to our annual signature event, Globant's CONVERGE. This year it will take place at the new Intuit Dome of the LA Clippers in Los Angeles. Globant has been behind the technologies that will change how live events are experienced. It is my pleasure to be back with you again and share my passion for innovation. Recently I penned a letter to our community to go over our growth vision in greater detail. You can check it out by accessing the QR code on your screen. And with that, I'll hand it over to our CTO, Diego Tartara. Diego, please, thank you very much. Diego Tartara Thanks, Martin, and hello everyone. We are focusing our AI expertise on clear and effective use cases to positively impact our clients' businesses. This quarter, the AI reinvention studio network has recently closed large deals in Europe and Middle East, connecting directly with CEOs and the broader non-tech C-suite executives. Globant has become a transformation partner, not only from a technology perspective, but from an expanding business one. We continue to lead in our AI offering. Over the past year, we increased the number of data science and AI engineering specialists at Globant by 70%, so that we can take advantage of the increasing AI demand. We see an excellent example of these focused capabilities with a leading US-based health research institute. Globant is applying AI and machine learning to improve data quality and make health care data research ready. The upcoming phase of the work will be to apply AI predictive models to understand various aspects of patient health journeys. Among our new AI-powered innovations is advanced video search, a solution we developed with Google leveraging the Google Cloud platform technology stack. Advanced video search detects what is actually being shown in any video on a frame-by-frame basis and provide semantic search capabilities. This opens opportunities for industry verticals where Globant is strong, such as media, gaming, sports and entertainment. It's particularly promising for our Sportian division, enabling contextually smart advertising, improving the efficiency and monetization levels for ad companies. Initial projects with clients are already underway. In our Globant enterprise studio network, we have recently advanced opportunities in the evolution towards SAP S/4HANA that major organizations using SAP are embarking on. Recently at Sapphire, SAP's signature event, we announced a partnership with AWS to accelerate businesses' migrations to SAP's RISE S/4HANA, their flagship ERP cloud offering. They also recently chose Globant to co-create an AppHaus, one of their few partner-led additions in the world. Our relationship with Salesforce also continues to grow as we were recently certified as one of its few expert-level partners for health care and life sciences globally, the first and only expert level partner for its data cloud offering in Latin America, as well as invited to join their global partner advisory board for data and AI. In health care, Globant is working with a global pharmaceutical company. They came to us because they were looking to establish a unified approach to accelerate AI deployment across all of their business units and regions. We are developing an adoption strategy and an operating model for an AI center of excellence, a place where they can experiment and test different AI initiatives across the organization. In the United States, Globant has been named as a digital transformation partner for one of the country's largest privately held companies. We have blended the expertise of 21 different studios into a complex yet cohesive solution that will execute a multi-year transformation program. The program will focus on legacy technology and application modernization, cloud infrastructure support and developing new capabilities to future-proof their business. Globant is also advancing our capabilities in providing solutions that bring both business growth and sustainability for our clients. Our offering includes technologies that analyze the potential environmental impact of carbon, water and waste in corporate decisions. They can, therefore, balance the financial budget and carbon budget of choosing one energy system from another. This has already been implemented successfully with Rockwell Automation, the result is an ESG focus that is quantifiable and impactful and can be melded into the corporate decision-making process. Our Globant GUT network continues to expand. GUT keeps working for some of the most beloved brands and getting rewarded. Their campaign Handshake hunt for Mercado Libre in Brazil received a Grand Prix at Cannes in June. This campaign where contextual Black Friday discounts popped up on TV screens every time a handshake, which also happens to be Mercado Libre's logo was shown is another great example of how technology and creativity are revolutionizing advertising and creating new effective revenue-driving opportunities. GUT won a total of 21 Cannes Lions, confirming another great year for the agency. We are excited to augment the work for Globant GUT's array of clients, which include Coca-Cola, Google, Stella Artois, Michelob ULTRA, Tim Hortons, FIFA, LaLiga and Mattel, among many others. From two decades in investing at the forefront of technology trends, we are determined to make our mark now that our investments in areas from enterprise to sustainability and AI are coming to fruition. I leave you all with Patricia Pomies, our COO. Thank you. Patricia Pomies Hello, everyone. Happy to be back. Let's start with our clients. We currently have 19 clients bringing in more than $20 million of annual revenue and $329 million that provide more than $1 million of annual revenue, 16.3% more than one year ago. Our largest client, The Walt Disney Company grew 11.1% year-over-year and 3% quarter-over-quarter. Among our 20 biggest accounts, the average duration of our client relationships is over 10 years. This is a testament to Globant's focus on developing true thought partnership with our clients executed through the quality of our delivery. As of Q2 2024, we see better traction and growth in every region compared to the same quarter in 2023. Our best-performing region this quarter was Europe, growing 44.7% year-over-year. As we announced in our last earnings call in May, here we were able to land the largest deal in our company's history, made possible by our scale and growth of our delivery network in the region. Our new markets region grew by 25.1% year-over-year. Latin America, 23.2% year-over-year and North America grew by 9.7% year-over-year. In addition, Globant's global revenue stream is the most diverse it has ever been. North America now makes up 56.3% of our revenue followed by Latin America at 23%; Europe at 16.9% and the Middle East and APAC at 3.8%. Of the eight industry verticals we provide services for, seven are up on a year-over-year basis and four experiencing double-digit growth. Year-to-date, all verticals have shown positive growth. This quarter, our fastest-growing vertical was travel and hospitality, up 58.9% year-over-year. Consumer, retail and manufacturing grew 38.7% year-over-year. Media and entertainment is up 20% year-over-year. This is on the back of a very strong performance with our top client, Disney, along with our expansion and momentum in sports with work we're delivering in the Middle East. The bank's financial services and insurance verticals showed a 11.6% increase in revenues compared to the same period last year. As of Q2, our total head count is 29,112 Globers, up 12.2% year-over-year. Of this figure, 27,133 are IT professionals. Our utilization rate is currently 79.5%, 20 basis points up quarter-over-quarter. As we look forward, our hiring is set to increase to meet our expanding demand. Our attrition level over the last 12 months is currently at 8.6%, this is down from 11.6% in Q2 2023. Finally, our Be Kind initiative continues to develop and impact our communities. As Globant has learned from our work using sustainability with our business, we developed Green IT to guide sustainable software development. We crafted a training for sustainable design essentials, which aims to equip our stakeholder ecosystem with the knowledge and skills necessary to create sustainable designs that minimize environmental impact and optimize energy efficiency. We have partnered with Udemy, one of the world's largest online learning platforms to also offer this training to a global audience for free. In July, our corporate investment fund, Globant Ventures, invested seed capital in Asteroid Technologies, a company dedicated to improving the quality of life for people with various disabilities. Through Hablalo!, their inclusive technological platform, Asteroid Technologies facilitates communication for over 400,000 people with speech disabilities worldwide. With this investment, we aim to bring these accessibility solutions closer to our clients, so that they can provide a more inclusive service to their consumers. Thank you for being with us again. With that, I will hand it over to Juan to share our financials. Juan Urthiague Thank you, Pato. We are very proud of our results today. First, our second quarter results are aligned with the guidance, showing strong growth and profitability. Second, we see positive trends in the business. Pipeline and bookings have been solid in the first half, while Gen AI-related projects are tractioning strongly, providing optimism about future demand opportunities. Third, we are maintaining a strong outlook for the year, and we are raising our adjusted margin and EPS guide. Let me provide more color. Second quarter results were strong across the board. Our Q2 revenues reached $587.5 million, up 18.1% year-over-year, in line with our guidance. Excluding the negative impact of foreign exchange, growth stood at 18.8% year-over-year. We saw a 10% year-on-year revenue growth in organic constant currency terms in Q2. Also, from a quarter-on-quarter growth perspective, the company posted accelerating trends from both a geographic and vertical split. Our pipeline remains at record highs, and booking trends reinforce our outlook for the year. Bookings in the first half are up 17% compared to the second half of 2023. We closed Q2 with an adjusted gross profit margin of 38.1% and an adjusted operating margin of 15.1%, both of them up 10 basis points quarter-over-quarter. This reflects our ability to maintain high profitability levels, despite the current context and currency fluctuations. Our effective tax rate stood at 20.2% for the quarter, resulting in an adjusted net income of $66.9 million with an 11.4% adjusted net profit margin. Adjusted diluted EPS was $1.51, up 11% year-over-year. Our balance sheet remains strong, ending the quarter with $180.4 million in cash and short-term investments or $54.8 million in net cash. With $125 million drawn from our $725 million revolving credit facility, we have ample funding for our growth initiatives. Also, as usual, given the seasonality of our business, we expect to generate a substantial amount of free cash flow in the second half of 2024. Looking ahead, for the remainder of 2024, we are reiterating our guide on a constant currency basis and raising our margin and EPS outlook. In organic constant currency terms, we continue to expect approximately 10.1% year-on-year growth for 2024. Recent FX trends, especially in LatAm, imply a slight incremental FX headwind on our top-line. However, we will be able to capture some of this cost benefit over the following quarters. We project Q3 2024 revenues of $611 million to $617 million, with adjusted operating margins between 15% and 16%. The IFRS effective income rate is expected to be in the 22% to 24% range. Adjusted EPS for the third quarter is now expected to be in the range of $1.60 to $1.64, assuming 44.4 million average diluted shares. For the full year, our revenue guidance is $2.407 billion to $2.421 billion, unchanged at the midpoint when adjusting for foreign exchange fluctuations. We are forecasting 70 basis points of FX headwind in our full year guidance. We anticipate adjusted operating margins in the range of 15% to 15.5%. 2024 IFRS effective income tax rate is expected to be in the 22% to 24% range. Finally, our adjusted EPS is expected to be between $6.30 to $6.50, assuming 44.3 million average diluted shares outstanding for the year, improving relative to our previous guide. In summary, we remain encouraged for the business with solid bookings, a strong pipeline, progress in AI adoption and an improving margin outlook while reiterating resilient top-line growth. Thank you for your continued support. We look forward to updating you on our progress throughout the year. Thank you, Juan, and hi, everyone. [Operator Instructions] With that in mind, we'll take the first question from today from the line of Tien-Tsin Huang from JPMorgan. Tien-Tsin, please go ahead. Tien-Tsin Huang Hi, thanks gentlemen. Thank you so much. Just maybe on the -- I'll start on the outlook just with the reiteration of the constant currency guide but the raise in the margin. Just wanted to check the confidence level now that we're through the first half. I know the bookings have -- are explaining or informing some of the revenue outlook. But how has that changed versus 90 days ago? Can you just also rehash what's driving up the margins as well? Thank you. Juan Urthiague Sure. Thank you, Tien-Tsin, for the question. So as you said, we are reiterating our constant currency growth for the year at 15.9%. In dollar terms, it is going to be 15.2%. The reason for that was the depreciation in Colombia and Mexico, primarily and a little bit in Brazil as well. In terms of -- I mean, at the same time, that this has impacted our revenue guidance from last quarter, it has also benefited us from the cost side, so on the margins. So basically part of the increase that we are seeing in our operating margin and our gross margin as well for the second half of the year comes from FX. It also comes from a slightly better than expected revenue per head, which has grown quite nicely this quarter. But the [RAC] (ph) side of this is on the revenue front, as we said, we have to increase 40 bps, the impact of FX for the year. Martin Migoya Yes. And regarding pipeline, it remains quite strong and bookings too. So we are in good confidence of the guidance that we provided, Tien-Tsin. Arturo Langa Thank you. Tien-Tsin. The next question comes from the line of Jim Schneider from Goldman Sachs. Jim, please go ahead. Your line is open. Jim Schneider Good evening. Thanks for taking my question. I was wondering if you can maybe expand, Martin, on your comments about Gen AI projects among corporates, are taking longer to scale into large scale beyond proof-of-concept, is that more a function of the lack of clarity about how to scale or maybe the lack of data stack comparability or other issues in terms of things that need to be resolved on the back end before bigger transformations can be undertaken. And can you maybe talk about any of the larger projects you've seen in Generative AI? And to what extent -- how many of those are there? And what is the magnitude in terms of scale revenue? Thank you. Martin Migoya Jim, thank you so much for the question. I will answer the first part, and then I will let it to Diego to answer. We have seen a pretty good growth in terms of our AI-related projects. As I mentioned, like 130% growth approximately year-over-year. And the thing about the projects, and many of them are still on - they are still analyzing them, are still trying to kind of generate a lab around AI to understand use cases and many of the companies and many of our customers are still in that stage. The thing is when you are implementing an AI project for a demo, it really looks great. I mean, for demo on social media, it really looks great and it is very easy. Now when you want to take it to enterprise class, as I mentioned, is disappointingly much more complex. And that requires, as you mentioned, data projects on the back. It requires a lot of supervision and after training because the model tends to be hackable. It tends to be a lot of the answers that the models give can be very misleading if they are not well curated. So those processes are long by definition. So we need to remember when the first app store from Apple born in 2005. And then only into 2009 or 2010, the big digital transformation projects started to happen. That was very long compared to what I think is going to be this time. But remember, this new technology has only 1.5 years in the state that you are seeing it right now. So I believe there is still time for corporations to understand the use cases. Of course, we're helping them in many of the situations. And of course, we are starting to see some of them starting to ramp up plans for doing much longer-term investments on that. But I don't think, it will be an easy process. And I think it will take a lot of time and understanding on where to apply it before they go full into the investment. But Diego, do you want to complement on that? Diego Tartara Yes, sure. So one of the things we've been seeing is I want to separate things between Gen AI, which is the new [key on the block] (ph), and traditional AI or machine learning. We've seen an increase on the projects, of course on both sides. There is a positive trend in terms of how we are being approached from our clients. We are now implementing on both sides, of course, projects that are meant to be live and productive. This is not an approach. I want to experiment with this. And we've done a ton of things from dealing with data, for example pharmaceutical companies to curate and label that data with AI and especially with Gen AI. This is actually productive. A lot of studies are being conducted on top of that, to streamline operations on copper and gold mining company, and now we're doing a 360 sustainability calculator and optimizer with AI models for it. So we are doing a ton of things that are actually productive. I would like to see a lot more -- in fact, I didn't mention this, which I think is great. We mentioned that we are working with agents for software development. We have also implemented agents for two major real estate companies to streamline all their operations. So this is not POC. This is actually live. So again, maybe in terms of the sheer volume of this, I'd like to see much more, but the trend in terms of what we are doing and how we are approaching for our clients, I see a super positive scenario. Patricia Pomies Also I think that you mentioned something about the challenge. And I want to -- do you remember that in the last earnings call, we also explained is that we have been upskilling and reskilling most of the Globers. And in 2023, we certify all the Globers in the AI. So I think that is really important. We are more than prepared for what is coming in terms of the talent and in terms of the recruiting and then where we're looking at that talent. So I think, this is really important for us is that all the companies having this AI mindset, and we are following what the clients are needing. Arturo Langa Thank you Jim. The next question comes from the line of Maggie Nolan from William Blair. Maggie, please go ahead. Maggie Nolan Hi, how are you? Thank you for taking my question. So you mentioned that revenue per head is improving or had grown maybe year-over-year. Is pricing power strong right now? Or are you experiencing any competitive dynamics in the pricing environment, maybe just overall, how would you characterize the environment compared to historical? Juan Urthiague It's tough these days, but we were able to achieve some low single-digit pricing growth. And we combine that with a different mix. In terms of services, we have been growing nicely our GUT creative network, which has a higher revenue per head as well. And also with some of the deals that we are delivering in Europe, we were able to also increase our on-site presence. So the combination of those factors is giving you almost 9% year-over-year revenue per head growth. It is a tough market, but we are still being able to get some positive pricing in some of our customers and relationships. Arturo Langa Thank you Maggie. The next question comes from the line of Bryan Bergin from TD Cowen. Bryan, please go ahead. Bryan Bergin Hi, guys. Thanks. Hopefully you can hear me. I wanted to ask about Gen AI and delivery. Can you comment on the latest impacts you're seeing on engineering productivity, and really how client discussions are evolving and the appetite around that, particularly if you could include how AI agents and the contracting dynamics around those work. Diego Tartara Sure. Hi Bryan, so separate -- again, I want to separate things. On the copilot side of things, I think there is a ton of public information about that. The actual result, what you see on the field in productive teams, large teams with large code base is actually the impact is a lot less than what it's been communicated at the very beginning, like 50% of the code is being generated by AI. But the impact definitely is there. The second aspect, which is agent, this is actually super new. And it has a different type of impacts depending on the task you're wanting to automate it. Remember that agents fully automates flows. So it is not about helping one individual and making that individual more efficient. On the agent side of things, we're seeing with super early test that we've been conducting pretty amazing results, like what we've been developing, we're seeing results that are above the benchmarks we are seeing in the market. So we're super, super confident that this will bring very, very nice results for teams, especially for some type of tasks like bug fixing as an example. Too early to commit to a number. But so far, it looks very promising. Arturo Langa Thank you Bryan for the question. The next question comes from the line of Jason Kupferberg from Bank of America. Jason Kupferberg Thanks guys. I just had a two part question on headcount. The first part is, do you expect positive growth in billable heads in the second half of the year. I think first half was kind of flattish. And then the second part is just on the second quarter headcount numbers, just looking quarter-over-quarter, I think India was up quite a bit, high-single digits. US was actually down about 10%. So I was just curious if there were any call out for those regions? Juan Urthiague So yes, we are expecting to continue with sequential growth in terms of headcount. In second quarter. IT professionals grew by about 200 net additions, and we expect to continue having positive net additions for the rest of the year. In terms of regions, we have seen -- we are seeing Argentina, Colombia and India as well, showing good growth. And it is a reflection of our position in those markets and us being the most relevant player in Latin America and with all the geopolitical noise that is happening around the world, Latin America continues to be a great place to be, and we are the company that somehow leads in that market. In the case of the US, it's out of a small base. and it varies by quarter. But there's nothing really to call out. Arturo Langa Thank you Jason. The next question comes from the line of Jonathan Lee from Guggenheim. Jonathan please go ahead. Your line is open. Jonathan Lee Great. Thanks for taking my question. Can you help unpack what you're seeing in the top five customer cohort given some of the sequential softness in the quarter? And how are you thinking about the trajectory of that customer base for the remainder of the year and perhaps into 2025? Juan Urthiague Which was the cohort, Jonathan, that you were talking about? Okay. So when you look at the top one, which is Disney, it showed really good numbers. I mean sequential growth, also like 11% year-over-year growth. And actually, we are expecting a strong second half of the year. So on the top one, definitely good news. When you look at 2 to 5, there is actually one customer in the professional services sector that -- as we spoke several times over the last few quarters, professional services sector was one of the laggards among the different industries that we have, and what you see in that cohort of 2 to 5 is actually explained by that. And then if you look at 6 to 10, if you look at the 10 until the end, you are also going to see a better numbers over there. So nothing in particular to be really concerned. It's just one customer within one industry that we have been saying for quite a while that is still not recovering as we would like. Arturo Langa Thank you Jonathan. The next question comes from the line of Divya Goyal from Scotiabank. Divya, please go ahead. Your line is open. Divya Goyal Good evening everyone. Patricia, you provided some color on different verticals and the growth across different regions. Could you provide a little bit more color as to how do you see the travel and hospitality segment broadly transitioning and which are some of the verticals where you anticipate growth in a go-forward basis? Thank you. Patricia Pomies Hi. Thank you for your question. Yes, we are seeing many of the verticals that we have in Globant are growing really fast. And of course, hospitality and travel has been one of the biggest one that is growing. Also, we are seeing in media and entertainment growth there also and many others. But the most interesting thing is that -- what we are having -- it's cutting -- or you hear me, okay? Yes, okay, sorry. What we are seeing probably is that in many of the industry, the clients that we have there. We have been a relationship with them with the main top customers for more than 10 years in many of the industries. So what we are building with them is a travel, is an experience together on how they want to change the contact with their customers and experience. So we are getting very deep in that expertise. And with the studios that we have, the reinvention and AI studios, we have been working very closely with the clients in terms of identifying what are their needs and what -- how we can help them. So as we were mentioning before, I mean, the seven industries where we are, we are seeing many changes going on and growing, and we continue to grow in most of the industries that where we are. Diego Tartara If I may add a couple of comments. We are growing strongly specifically on the travel and hospitality vertical that you mentioned, because of mainly two things. One is we closed, and we've been mentioning this, a big transformational deal for a large airline in Europe. That's one of the key drivers. Our airline studio is actually super, super solid in the segment. And the second one has to do with connected experiences that's the latest AI reinvention studio that we launched. And a lot of the business we have in MENA is actually from the hospitality vertical. So that explains the growth, but it is super tied to how solid Globant is in those specific verticals. Juan Urthiague Maybe to complement on media and entertainment, you are also going to see further growth as Disney continues to perform, as well as our business within sports. We are also seeing good momentum in consumer and retail. That has been also delivering good growth. And on the BFSI, you're also going to see some growth. The two only industries that -- I mean, professional services, as we said before, that's not showing growth. And technology and telecommunications has actually stabilized. I mean we did show some growth in Q2, but basically coming out of several quarters of underperformance, we can say this is the second quarter that we see some positive news there. So technology and telecommunications have stabilized, Divya. Arturo Langa Thank you Divya. The next question comes from the line of Arvind Ramnani from Piper Sandler. Arvind, please go ahead. Arvind Ramnani Hi, thanks for taking my question. Just one quick discrete question I wanted to ask was organic constant currency target for the year that you have now versus organic constant currency you had 3 months back, but just a discrete question. But the bigger question I have is also on the overall market, right? I mean, now it's been two years or three years now where Globant's been able to grow an idiosyncratic way, right, like in the rest of the industry is kind of languished, vibrating at like plus 3%, 4%, minus 3%, 4%, but Globant's been like three years now where you've been able to really outpace that growth. And while I'm not looking for any kind of guidance in 2025, what is your view of the industry growth rates starting to improve, right? Or are we going to be in this permanent sort of 0 to 5 for the broader industry? Juan Urthiague So I'll take the first part, and then I'll ask Martin to complement. Basically, the number organic constant -- the growth in terms of organic constant currency growth for -- that we [Technical Difficulty]. Were back. So basically --. Arturo Langa Juan, if you don't mind starting from -- I wasn't able to hear any of it. Juan Urthiague Yes, I will start again. So when you look at our constant currency growth for the quarter -- sorry for the year, we are at 10.1% constant currency organic growth which is the same number that we provided back in May. When you look at the total growth number this quarter for the year, we are guiding 15.2% with 70 basis points of impact back, so 15.9% constant currency growth. Back in May, we guided 15.6% with 30 basis points of impact. So basically, the change is 40 basis points of additional FX impact, which is aligned with what is happening in Mexico, Colombia and a little bit in Brazil. The good part of that impact is that we were able to increase our operating income guidance for the year. We moved out of 14.5% to 15.5%. We are now at 15% to 15.5% for the year, and also the guidance for the third quarter and basically the same one for the fourth quarter. The implied guidance there is 15% to 16%. So that's the overall picture in terms of FX impacts in this quarter. And I don't know, Martin, if you want to talk a little bit... Martin Migoya No. The main reason, I think, why the industry is, let's say, plus 2%, minus 2% or minus 5%. And we're still growing at very healthy rates, is that the decisions that we took in the past. I mean, when we say that the vision we have is to try to leverage our relationships and being able to sell every day more things to our beloved customers. This is extremely powerful when you take it in the long run, and we have been executing that in a pretty consistent manner. The second reason is that we have been expanding into markets in which we were not present before. So now we are entering a big tying into the Middle East, into some other countries in Oceania, in Asia. And that is providing us like an additional fuel for growth -- that we didn't have before. So when you add up those 2 things, plus the organic growth of our largest customers, which is still very healthy, then you have a performance, which is pretty different from the rest. Another way to understand that could be to say that Globant is gaining market share. While the market is not growing, and you are still growing, then you're winning market share. And this is extremely important for us. And also the revenue per head. When you see the revenue per head that Juan explained before, you see it increasing to very good and very healthy levels that is a testimony of the value that we are delivering to our customers. On top of all that, a very strong growth on the AI space that we have been preparing for the last 10 years. So I think, that is a good summary of the reasons why Globant is growing, fueled by a very powerful culture by -- and a very high ambition of reinvented way that technology is being created, reinvent the way that we connect with our Globers, with our customers, with all our stakeholders. So we are extremely happy with the performance, and we will keep on hopefully, driving that kind of performance for next year or two. Arvind Ramnani Okay, perfect. Thank you. And just one quick one, if I can, is also you had bookings growth of 17%, which is faster than organic constant currency revenue growth. And I know bookings comes with various duration. But the fastest sort of bookings growth, does this suggest that kind of next year, you should be seeing acceleration in the business on the revenue side? Juan Urthiague I think it's still early to talk about 2025 in detail. I mean there is a lot of things going on around the world, elections, rates and a lot of things that will have somehow an impact. I think that it's good to see sequential growth into Q3, into Q4 and also of course during Q2 as well. So I think it is a -- we need to focus on that, while we continue to increase, to strengthen our service offering to keep on expanding globally to be able to tap into new markets. And I think that will help us to continue delivering industry-leading growth. But that's why I leave it to put numbers for next year. Arturo Langa Thank you Arvind. [Operator Instructions] The next question comes from the line of Sean Kennedy from Mizuho. Sean, please go ahead. Sean Kennedy Hi, everyone. Thanks for taking my question. So there were reports that a large sports organization was looking to raise a significant amount of money to enhance and expand its direct-to-consumer streaming service. So my question is, broadly speaking, is that a theme that you're seeing in digital experiences across your customers, a second investment wave in DTC streaming? Martin Migoya We are seeing like a lot of things happening on entertainment space. There is a lot of companies trying to reinvent the way they connect with their consumers. And we are seeing that specifically on the subject that you mentioned, I have no specific answer to give you. But yes, in general, on the media and entertainment space, a lot of things are happening. I don't know Diego, if you want to add up on that? Diego Tartara Sure. Direct-to-consumer within the media and entertainment, it is a trend. Disney is doing exactly that even though they are also consolidating different channels. Within the sports, yes, direct-to-consumer, it is a trend. This is actually public. Many different sports organizations are exploring that. FIFA, of course being one of them and is one of our clients. So Formula 1, too. So yes, direct-to-consumer is that my only question mark on that, and this is actually, it's -- we still have to see is that demand looks for consolidation. And so we'll see how those things play together. The next question comes from the line of Surinder Thind from Jefferies. Surinder, please go ahead. Your line is open. Surinder Thind Thank you. Diego, just questions for you actually. Just following up on earlier commentary about just kind of the productivity improvements in some of your internal AI initiatives. You mentioned the disconnect between what's kind of in the public space between what you're seeing. Can you provide any incremental color there in terms of what exchange marks or measurements that you've done? I mean I remember when we talked about it last year, you talked about potentially getting to about a 15% productivity improvement. So just any color would be helpful. Diego Tartara Yes, that is correct. So -- but actually, when I say those numbers, I was like -- everyone was looking for, like everyone else is saying 50% now, everyone is talking about around those numbers for a productive environment. So I don't want to be super technical and bore everyone, but there is not only - it is not only a measurement of performance of the individual, increased performance of the individual. It is like collective performance and what it means for the teams. We've seen major improvement in more junior type of developers and more senior type of developers not quite relying on those tools so heavily. But the problem with junior developers is that it brings very good quality code compared to what they would have done without those tools. But if you say as a unit, it is like a car spare part, it looks super good, but it doesn't fit the car. So it's kind of tricky. What's important to us, it's overall team performance. It's not individual. And we're measuring like things that when you put all of that together, they don't necessarily add up. I think with regards to that, agents play better as they fully optimize complete flows and which is what we are actually trying to do and what's interesting. Numbers, like I said I can confirm that it is for developers, which is typically what you are trying to explore for code generation, the tooling will give you an improvement around -- it's actually even lower than 15%, tools such as copilots, but for some individual tasks such as unit testing is super high, like 40% improvement both -- for that specific type of task. So yes, I can confirm what we started talking a few quarters back. And still I think there is a lot of room for improvement towards the future. We will see how it develops. We are pretty confident that we are headed in the right way -- in the right direction, sorry. Arturo Langa Thank you very mych Surinder. The next question comes from the line of Leonardo Olmos from UBS. Leonardo, please go ahead. Leonardo Olmos Hi, everyone. Congrats on the great results. So my question is regarding the utilization rate. We saw another improvement quarter-on-quarter. And also an impressive reduction on the attrition rate, right? What we've been seeing with several of our -- the companies we cover here such as Accenture is an improvement overall in IT services. Do you think there could be, at some point, could be an increase back again on the attrition rate or the demand for developers? How is your idle capacity regarding that? What do you expect for the second half in '25, in that sense? Thank you. Yes. Well, what we are seeing right now in terms of the attrition, as you mentioned is pretty low right now. Of course, it has been raising a little from the last quarter, but we are still in very low rates. What we are seeing is that the demand is still very, very high for us. So we continue hiring in many of the countries that Juan explained before. We are very strong in LatAm as we have been in the last couple of years. And of course, India is another of the places that where we are growing. In terms of the people, even what we are seeing for the rest of the year is much pretty stable numbers and probably we -- of course, the market is still growing, as you mentioned. But we have a great culture that people are staying with -- they're very happy in all the polls and the interviews that we are making with our Globers and the culture that we have is really appealing for the new generations and the engineers and talent and designers. So I think that from Globant's perspective, I mean, these numbers are pretty stable, and we continue doing different kind of things in order to have the same kind of numbers that you are seeing now. Arturo Langa Thank you Leonardo. The next question comes from the line of Thiago Kapulskis from Itau. Thiago please go ahead. Thiago Kapulskis Hi, guys. Thanks a lot for the question. I have a follow-up on the AI part. Just to get it clear. My guess from what you guys said is that it's a long cycle, right? So you have data migration, you have test approving, et cetera. Just want to understand a little bit better how you envision the cycle? Is it like three year, it's a five year cycle how -- what needs to happen for the budgets to ramp up? Is it just about testing and getting a concept of hypothesis proven, and then there is a ramp-up, is it a data like kind of bottleneck like the data bottleneck is as bad as it was in the previous cycle. I don't know if you could provide us some details there. Just to get a little bit better framework of the cycle there, it would be great. Martin Migoya Yes, I would take the first part, and then I will let Diego. Look these projects, I think the most time now is being spent on finding the use cases and finding and validating the use cases. Once the use cases are validated, then it takes a little bit longer than what everybody expects using regularly using ChatGPT, right? I mean -- but it takes much longer to have an enterprise-grade application based on that information. Also, data projects are projects that for many years has been delayed and everybody was talking about AI, but really not getting real effects on that. So I think data projects are being accelerated these days. I don't think they are a bottleneck, I think it is more like a maturity process that needs to go through the corporation until the use case is detected. The use case is proven and then the use case is scaled. And that may take maybe one year or two years. We don't know exactly. Following other cycles, it has taken much longer. But I think this cycle will be much shorter than that. But still it is unclear when those things are going to start to happen at a larger scale. Now we are -- ended up using AI in pretty much everything we do. And it's -- we have been using that in the past, and now even more with the agents, with the acceleration platforms that we have with the automation of many of the staffing processes that we have at Globant and work -- how to connect people with projects. So I think in the same way we are doing at Globant, there must be -- and by the way, we launched AI re-invention studios for many of the industries in which we operate. And the aim of these AI reinvention studios is very simple and clear, which is we need to provide to our customers proactively at least of how to use AI in every single area of that specific industry. And that's a mandate we have in our company. That's a mandate that Diego has as the CTO of the company, to keep on creating those use cases and to accelerate our customers to be more productive, the sooner, the better. Yes, sure. So going back to the original question, there is a yes when it comes to data, not as a blocker but as a first step towards actually embracing more AI-related projects. Lots of our clients are actually taking care of that. So we've been seeing an increase on the data architecture demand, and this is for covering their whole data strategy. I think it was -- lots of companies did not take care of that aspect, and they are now identifying the need. So that's the first thing. Then also lots of customer engaged, and we've been talking about that. And when we used to say the POCs, exploratory work, et cetera, et cetera is it had to do a lot with a newer technologies like Gen AI, how do I use this? I see that is super powerful. How do I make it a productive tool, an enterprise-grade tool. And for that, we have a solution and an approach and a go-to-market approach. But the most interesting thing is actually what Martin said, which is identifying industry solutions. What are the things? I mean given this technology, if I think on a certain vertical landscape, what are the opportunities there? What can I optimize? How can I capture more clients? How can I change my loyalty program? How can I optimize my marketing campaigns? How can it change my acquisition funnel? So there is a lot of things, and every single industry has a ton of problems, right? They spend a lot of money, I don't know. Pharmaceutical companies spend a lot of money in research and attrition for experimentation. And we can now address those industry pains with AI solutions. This is a very powerful tool. So that's what we are doing. Thank you very much Thiago. So that will be all for the Q&A session today. Thank you all for joining. And now I'll hand it over to Martin for some closing remarks. Martin Migoya So thank you very much, everyone. Thank you for your support and coverage and looking forward to see you next quarter. Cheers. Bye, bye. Thank you.

Earnings call: Accuray reports robust growth amid market challenges By Investing.com

Accuray (NASDAQ:ARAY) Incorporated (NASDAQ: ARAY), a radiation oncology company, announced in its fourth-quarter earnings call that it experienced a 14% increase in total revenue year-over-year, with a significant boost from international markets and system shipments. Despite some margin pressures and challenges in the US market, the company remains optimistic about its strategic growth plan and the future fiscal year. Accuray's leadership, led by President and CEO Suzanne Winter, expressed confidence in the company's strategic growth plan despite some headwinds. The company's focus on innovation, service business expansion, margin improvement, and strategic partnerships is expected to drive long-term growth. With a strong order backlog and a clear plan for addressing market challenges, Accuray is poised for continued success in the dynamic healthcare sector. The company is scheduled to provide its next earnings update in October. Accuray Incorporated (NASDAQ: ARAY) has shown resilience with a 14% increase in total revenue year-over-year, highlighting the company's capacity to grow amidst market challenges. However, a deeper dive into the company's financial health using InvestingPro data and tips reveals several points investors should consider. These insights suggest that while Accuray is making strides in revenue growth and market expansion, potential investors should be aware of the company's profitability challenges and stock performance. As Accuray navigates these financial headwinds, it is crucial for stakeholders to monitor these metrics closely. For a more comprehensive analysis, investors can explore an additional 10 InvestingPro Tips available at https://www.investing.com/pro/ARAY, which could further inform investment decisions regarding Accuray Incorporated. Operator: Good day, and welcome to the Accuray Fscal 2024 Fourth Quarter Financial Results Call. All participants will be in listen-only mode. [Operator Instructions] After today's remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Jesse Chew, Senior Vice President and Chief Legal Officer. Please go ahead. Jesse Chew: Thank you, operator, and good afternoon, everyone. Welcome to Accuray's conference call to review financial results for the fourth quarter of fiscal year 2024, which ended June 30, 2024. During our call this afternoon, management will review recent corporate developments. Joining us on today's call is Suzanne Winter, Accuray's President and Chief Executive Officer; and Ali Pervaiz, Accuray's Chief Financial Officer. Before we begin, I would like to remind you that our call today includes forward-looking statements. The actual results may differ materially from those contemplated or implied by these forward-looking statements. Factors that could cause these results to differ materially are outlined in the press release we issued just after the market close this afternoon, as well as in our filings with Securities and Exchange Commission. We based the forward-looking statements on this call on the information available to us as of today's date. We assume no obligation to update any forward-looking statements as a result of new information or future events, except to the extent required by applicable security laws. Accordingly, you should not put undue reliance on any forward-looking statements. A few housekeeping items for today's call. First, during the Q&A session, we request that participants limit themselves to two questions and then re-queue with any follow-ups. Second, all references to a specific quarter in the prepared remarks are to our fiscal year quarters. For example, statements regarding our third quarter refer to our fiscal third quarter ended June 30, 2024. Additionally, there will be a supplemental slide deck to accompany this call, which you can access by going directly to Accuray's Investor Relations page at investors.accuray.com. With that, let me turn this call over to Accuray's Chief Executive Officer, Suzanne Winter. Suzanne? Suzanne Winter: Thank you, Jesse, and thank you all for joining the call. Today I will provide highlights from our fourth quarter and fiscal 2024, both on our accomplishments and the areas of focus for FY '25 and beyond. I am pleased with our solid performance in the fourth quarter, with total company revenue growing 14% year-over-year, reflecting strong operational and commercial execution. This growth was driven by a record number of system shipments within the quarter, representing 20% more than our previous highest shipment milestone. Momentum going into FY 2025 remains elevated, particularly in the international markets, which represented more than 80% of our revenue for the fiscal year and reflects the strategy we laid out at the beginning of FY '24 of entering emerging markets where patient access to radiation therapy is under-penetrated and where we can become the number one or number two player over time. In the quarter, we saw shipments accelerate nicely, both to new customers and by closing open opportunities from the prior period. We also saw orders growth of 8% versus last year, largely driven by emerging market growth in APAC and Latin America. China, which despite remaining headwinds from the anti-corruption campaign, grew orders by 80% in the quarter year-over-year, driven by pent-up demands for the new Tomo C product, which recently received approval for our precision treatment planning system, making our Tomo C products ready to ship to end customers. Gaining share in Latin America is a priority for us, and this region saw order growth of more than 400% within the quarter, including a four-system competitive replacement win in Mexico. Finally, I was very pleased with our global Q4 book-to-bill ratio, where even with record revenue shipments, it was healthy at 1.2. We believe the book-to-bill metric continues to represent a strong leading indicator for future revenue. Product revenue contributed materially to the growth within the quarter, up approximately 28% year-over-year, driven by strong demand in China which grew product revenue by 55% compared to the prior year and the rest of the APAC which grew significantly year-over-year. EIMEA, our largest region, delivered 27% year-over-year product revenue growth. The Japan region was up 1% for the quarter year-over-year, and excluding headwinds from FX, grew product revenue by 13%. Japan is a very strong market for us, and we have put in several initiatives to help mitigate the impact of foreign exchange. We remain the number two market share player and continue to drive share gain on our path to becoming number one in the developed market. Finally, the Americas region, as we had expected, continued to show weakness in Q4 with product revenue down 50% year-over-year, driven by customer delays and installation. We believe we felt the greatest impact in FY '24 and are cautiously optimistic that we will see conditions improve in the US market and show year-over-year growth starting in the second half of FY '25. Service revenues for the quarter were down slightly due primarily to unfavorable FX in Japan and reduced training and spare parts revenue. However, I am encouraged that recurring service contract revenue was up 4% year-over-year as we start to see the results of our strategy of driving install-based growth by penetrating emerging markets like China where service revenue grew 22% year-over-year. During the quarter, we received final approval on our precision treatment planning system for China, which was the final step in our approval process for the Tomo C platform. As of late fourth quarter, we now have the ability to sell and ship full systems to Tomo C customers in the Type B segment. As a reminder, with this final approval, we can now fully record margin at time of delivery from our joint venture site in Tianjin to the end customer for all of our Tomo C shipments in China. With this approval behind us, we are now able to fully compete in the Type B market, which represents approximately $3 billion in market potential over the next five years. Ali will discuss more of the Q4 financials, but I wanted to touch briefly on margins, which continues to be an area of focus. Although our overall Q4 adjusted EBITDA margins were within the range we expected, we believe that several factors that negatively impacted margins were transitory in nature and masked underlying productivity improvements we have achieved from our margin expansion initiatives. From a product perspective, the later timing of the approval of precision treatment planning system in China delayed when we could recognize full margin. With the clearance now behind us, we've begun shipping Tomo C to customers and shipped our first system late in Q4 FY '24 and expect the majority of shipments to accelerate starting in Q2 of FY '25 based on customer readiness. This represents approximately $4 million of margin that was deferred at the end of FY '24. Within service, margins were mostly challenged by foreign exchange, which impacted our Japanese business performance materially, where we have a large installed base. In addition, in Q4, we experienced an isolated supplier quality issue that caused a $2.4 million increase in parts consumption costs. We are working closely with the supplier and expect this to be resolved and recover the majority of these costs over the fiscal year. Once adjusted for the China margin deferral and the supplier quality issue, our Q4 gross margins would have been improved versus the same period in the prior year. Finally, region mix was a headwind to margin as we experience weakness in the US market, which is a higher margin market for us. As discussed, we believe this is a temporary challenge in the US market and are encouraged by the Q4 order performance in the US, which grew 9%, suggesting signs of gradual improvement. Moving into FY '25, we will be monitoring the timing of order-to-revenue conversion as a leading performance indicator for recovery in the US as this significantly [contributed to slowed revenue growth] (ph) in FY '24. Reflecting on our full year performance, I remain incredibly proud of what our teams accomplished and remain humbled by our mission, which is centered around advancing care in radiation therapy through innovation, expanding patient access to radiotherapy globally, delivering superior service and support to our customers. We remain confident based on the positive secular trends in our industry as well as our ability to execute well and gain share in the markets we participate in. While global revenue was flat for the year, I am encouraged by the strong momentum in our international and emerging markets. Excluding the Americas region, international revenues grew 10% year-over-year for fiscal 2024. China revenue grew 27% year-over-year, whereas the rest of APAC grew 14% year-over-year. Our EIMEA region grew 8.5% year-over-year, driven in large part by higher growth sub-region markets like India, Middle East, and the CIS or the Commonwealth of Independent Countries. Japan was down approximately 11% year-over-year, driven largely by the impact of FX. And as I mentioned before, the Americas region, most notably the US, continued to lag other regions, declining 26% year-over-year. Despite the near-term challenges in capital equipment budget cycles, we believe that the long-term potential of the US market remains intact, with the advanced age of the US installed base of radiotherapy systems providing a catalyst for upgrade and replacement opportunities. We expect to see gradual improvement in the US in the second half of FY '25 into FY '26 where we estimate more of a full recovery. Moving on to service revenue for the full fiscal year, overall revenue was down 1% year-over-year. However, recurring contract revenue grew 4.5% year-over-year. As we mentioned on prior calls, we believe that our service solutions business is a huge long-term opportunity for both revenue and margin growth. The expansion of recurring service contract revenue demonstrates underlying performance improvements from the early stages of our plan. These include rules of our installed base, impact of pricing actions, investments that will improve system uptime and serviceability performance, like our agreement with Airbus, which will leverage data and predictive analytics to help reduce customer downtime and reduce parts consumption. Finally, we introduced new service solution offerings like CyberComm for the CyberKnife system, physics solutions like our partnership with TrueNorth, and advanced education offerings, which we will deliver in our global education centers like the newly opened Innovation & Partnership club in Genolier, Switzerland. We expect these areas will drive top line and margin improvement while increasing overall customer operational improvements and satisfaction. As we have articulated in the past, there are four major pillars of our strategic growth plan. Our first pillar is driving top-line growth through innovation to advance radiotherapy and solve our customers' biggest needs. During the year, we had several product introductions that strengthened our portfolio and further differentiated Accuray technology. Customer adoption of our new product innovation has been strong. Notably, this included a 31% year-over-year growth in CyberKnife system orders. We believe the rapidly growing clinical trends toward shorter course of latest treatments in one to five sessions backed by clinical data over the long term for areas like prostate, lung, and neuro treatments is driving the increase in CyberKnife system demand. Additionally, many CyberKnife system customers report strong patient awareness for our CyberKnife system versus other treatment platforms, with many specifically requesting to be treated on the CyberKnife system due to its strong branding and high precision capabilities. A key area of focus for R&D investment will be the expansion of next generation capabilities for the CyberKnife system to further advance the use of stereotactic radio surgery and SBRT and drive replacement of our installed base in the developed markets like the US, Europe, and Japan. Customer reception also continues to be strong on our Radixact platform, which represents approximately 70% of product orders in FY '24, driven by ClearRT CT imaging, Synchrony real-time motion management, VitalHold which expands our breast treatment capabilities, and Cenos online adaptive functionality that we introduced as a works in progress and are planning a full introduction at ASTRO '25. Beyond penetrating the China market, we also intend to serve other high potential markets where patient access to radiotherapy is challenged, particularly India, where we introduced our new Accuray Helix product at the Indian Cancer Congress last fall. Today, we are announcing that we have obtained CE mark clearance for this product with a press release to follow and will ship our first unit to India in the coming months. Our next strategic pillar is expanding and growing our service business. We set out a multi-year plan to strengthen our service business, which represents a recurring revenue stream and margin expansion opportunity. Our service revenue has been essentially flat over the last decade and currently represents 48% of our global revenue for fiscal '24. Service contract revenue growth is largely gated by growth of our installed base. In FY '24 we saw an expansion of our global installed base in three of our four regions, driven by meaningful growth in the APAC region and healthy growth in both EIMEA and Japan regions. We're taking a longer term approach in the US with focused commercial investment, expanding our commercial footprint with the goal of ensuring the highest level of service and customer satisfaction. So, we're best positioned in competitive replacement cycles as well as upgrading our own installed base. Expanding margin and profitability and improving our balance sheet was our third pillar. In 2023, Ali and I laid out a multi-year, multi-faceted plan to drive margin expansion and cost efficiencies with the goal of leaving no stone unturned. While we have made good progress against our goals with actions that have helped us to navigate the impact of inflation, logistics costs, and foreign exchange fluctuations, we are still in the early innings of improvements and believe that we've laid out a strong foundation to show material improvement for margins as macro factors improve and as we increase scale. Finally, in FY '24, we strengthened our existing strategic partnerships with GE Healthcare and RaySearch, and also created new ones, like our product development partnerships with C-RAD, Limbus AI, Radformation, and service partnerships with Airbus and TrueNorth. We believe these alliances help us bring best-in-class solutions to the market faster, improve our sales funnel, and enhance our win rate. I wanted to take a moment and highlight some of the key milestones in FY 2024 that have put us in a more favorable position going into FY 2025. We enter FY '25 with a strong backlog of orders, which at $487 million represents over two years of product revenue potential. From a demand perspective, we saw global orders grow by 10% year-over-year for the full year, an annual book to bill ratio of 1.5, exceeding our goal of 1.2. On the operational side, we completed the first full year on our new SAP ERP system without major negative disruption. I'm extremely proud of our teams, as this was a foundational milestone for the company. I expect continued productivity benefits and better data and analytics to help us make improved operational decisions to drive further efficiencies. As I've mentioned on past calls, working capital will be a key part of cash flow improvements. And we delivered a $21 million reduction in total net inventory from Q3 and $7 million reduction for the fiscal year. This remains a priority for us going into FY '25. And finally, entering into the Type B market in China has been a long journey for us and I am pleased with how we have worked as a cross-functional team to ramp up our joint venture manufacturing site in Tianjin, completing the first 10 system builds of Tomo C and executing our first customer shipment of Tomo C in June to Shandong Hospital. With these key milestones behind us, I believe we are well positioned to execute our strategic growth plan in FY 2025. The US remains challenging, and we will continue to monitor key performance indicators. Additionally, we will closely watch China market conditions, including any remaining slowdown due to the anti-corruption campaign, in addition to the timing of the China stimulus program, which we believe can be a potential tailwind aimed at replacement opportunities. These factors could impact demand for installations in FY '25, but believe these are timing related and difficult to predict exact timing and trajectory, and therefore remain prudent in our guidance as we wait to see stronger signals of US market recovery. And in summary, I'm proud of the foundation we've set for future growth. We achieved strategic customer wins in the marketplace, penetrated new markets and forged key partnerships that enhance our solutions and improve our competitiveness. While we are still early in our transformation, we end the year to drive top-line growth, gain share in the markets where we compete through strong growth in margin and profitability over the coming years. I will now turn it over to Ali who will cover our financials. Ali Pervaiz: Thank you, Suzanne, and good afternoon everyone. I would like to begin by thanking our global cross-functional teams who banded together and executed with unwavering dedication to deliver the strongest revenue quarter in the company's history. As we had mentioned before, fiscal year 2024 was a very important year for our company. Not only did we enter the value market of radiation therapy equipment to essentially double our addressable market, we also continued to add more operational efficiencies to our business model, which continues to move the needle in our margin expansion plan. Although we face macroeconomic headwinds, particularly in the US, as well as unfavorable foreign exchange and inflation, we believe we are in a good position for growth in most of our markets and are well positioned when the US market recovers. Now, turning to the quarter. Net revenue for the fourth quarter was $134 million, which was up 14% versus prior year, and the highest reported revenue quarter in the company's history, exceeding Q4 of last year by $16 million, exhibiting strong demand for innovations driven by a 28% increase in year-over-year product revenue. Net revenue on a constant currency basis for the fourth quarter was approximately $137 million, which represented a 16% increase versus prior year. On a full year basis, total revenue was $447 million, which is roughly flat from the prior fiscal year. On a constant currency basis, total revenue for the fiscal year was $448 million and represents a slight increase versus the prior fiscal year despite the Americas region being down 26% versus prior year. Revenue in the rest of the world grew by 10% year-over-year and made up 80% of our global revenue in fiscal year '24, which is a powerful indication of our continued strength in those markets. Product revenue for the fourth quarter was $80 million, up 28% from prior year and up 29% on a constant currency basis. As Suzanne mentioned, product revenue included 36 system shipments, which is the new record number of shipments in the company's history, and a 24% is unit growth versus prior year. On a full year basis, product revenue was $234 million, roughly flat from the prior year. Full year product revenue adjusted for the impact of foreign exchange was $235 million, representing a slight increase versus the prior year. Service revenue for the quarter was $55 million, down 2% from the prior year and flat on a constancy basis, primarily driven by $3 million of lower revenue related to training and lower spare parts volume. Notably, the contract revenue portion of our service business was up 4% or $1.8 million versus the prior year, which showcases growth in the mostly annuity part of the service business as our installed base continues to expand globally. Full year service revenue was $212 million, down 1% versus prior year. Service contract revenue was also a highlight for full year service revenue, which grew at 4.5% and contributed $8.5 million in additional revenue versus last year. This is noteworthy since contract revenue represents greater than 90% of service [revenue] (ph). Gross orders for the fourth quarter were approximately $95 million and represented a book-to-bill ratio of 1.2. On a full year basis, gross orders were $342 million and represented a book-to-bill ratio of 1.5. Moving to the backlog, we ended the fourth quarter with a backlog of approximately $487 million, which represents greater than two years of product revenue and we feel confident about the ability of this backlog to convert to revenue within 30 months. As part of our diligence in ensuring a high quality backlog, we canceled three units representing approximately $6 million of orders due to evolving customer dynamics. Our overall gross margin for the quarter was 28.6% compared to 31.9% in the prior year, with the year-over-year decline primarily due to 2.1 points of higher margin deferral from China shipments and 2.1 points from higher parts consumption. Excluding these two factors, our reported gross margin would have been higher by 4.2 points, implying year-over-year margin attrition. As discussed in previous quarters, the China margin deferral is a delay of margin recognition until the final product makes it to the end user, and we expect to recognize all of the deferred margins in Q2, FY '25, and beyond. Parts consumption was higher due to a supplier quality issue we faced in the quarter that resulted in higher than anticipated failure rate of a critical component utilized in our CyberKnife platform. Our engineering teams have worked closely with the supplier to identify the root cause and have put appropriate corrective actions in place. We continue to monitor this quality issue and expect it will be resolved in the first half of fiscal year '25. Excluding the China margin deferral and the higher parts consumption, our gross margins would have been higher than prior year, driven by lower costs due to productivity actions the team has prioritized, along with higher contract revenue and pricing in our service business as part of our margin expansion actions. On a full year basis, our overall gross margin was 32% compared to 34.4% in the prior year, with the decline mainly driven by 1 point of higher China margin deferral, which we expect to contribute to margin beginning in Q2 of fiscal year '25, and 2 points of higher net parts consumption versus prior year, which was partially due to the supplier quality issue mentioned earlier. Foreign exchange overall served as a 30 basis points headwind for us in fiscal year '24. The Japanese yen alone contributed to a 1.1 point headwind which was partly offset by other global currencies during the year. Had the Japanese yen not deteriorated by approximately 12% through fiscal year '24, it would have contributed an additional $5 million to our bottom line. Operating expenses in the fourth quarter was $31.6 million compared to $38.1 million in the fourth quarter prior fiscal year. This 17% year-over-year reduction was driven by improved efficiencies across the organizations, benefits from the restructuring we announced earlier in the year, and a lower company bonus payout. Operating expenses for the full year were $142.4 million compared to $151.6 million in prior year, representing a 6% reduction in the year-over-year, showcasing focused cost control as we continue to push our teams to prioritize return on investment as part of our margin expansion actions. Operating income for the quarter was $6.8 million compared to a loss of $0.5 million from the prior year. Operating income for the full year was $0.5 million compared to $2.4 million in the prior fiscal year. Adjusted EBITDA for the quarter was $10.1 million compared to $5.2 million for the prior year period. For the full year, adjusted EBITDA was $19.7 million compared to $23.9 million for the prior period. From a year-over-year perspective, there were two main factors that negatively impacted our adjusted EBITDA. Firstly, we deferred $5 million of additional China margin versus last year, which we know are the timing related issues that will result in a benefit starting in Q2 of fiscal year '25 and will be normalized going forward now that we have the NMPA approval for the precision treatment planning system. Secondly, we experienced $4 million of higher parts consumption, on which $2.4 million was related to a particular supplier quality issue, which we anticipate resolving in the first half of fiscal year '25. Without these two issues, our adjusted EBITDA would have surpassed last year, which points to strong underlying operating performance of the business. We describe the reconciliation between GAAP net income and adjusted EBITDA in our earnings issued earlier today. Turning to the balance sheet. Total cash, cash equivalents, and short-term restricted cash amounted to $69 million compared to $61 million at the end of last quarter. Net accounts receivable were approximately $92 million, up $19 million from the last quarter, with a record number of system shipments. Our net inventory balance was $138 million, down $21 million from the prior quarter. I'm extremely proud of the way our teams executed to improve working capital performance with a substantial decline in inventory and an increase in cash, which resulted in a $9.4 million of free cash flow generation in Q4. In summary, fiscal year '24 was a challenging year for us to execute through from a macro standpoint. While we saw inflation ease slightly over last year, the foreign exchange volatility, especially the Japanese yen, served as a big headwind that hampered our results. Additionally, the slowdown of the US market drove a 26% year-over-year decline in revenue from that region, which also happens to be a higher margin region in our portfolio. Despite those headwinds, our global teams worked tirelessly and were able to grow total revenue by 10% year-over-year, excluding the Americas, which also represents 15% year-over-year growth in product revenue, which will serve as a catalyst to our service business in the coming quarters. Another positive indicator for our business was a strong growth in service contract revenue of 4.5% year-over-year, which represents more than 90% of service revenue. I'm extremely proud of the financial discipline and operating rigor we have put in place over the last two years across our entire organization. Our teams continue to execute from an operational perspective and are laser-focused in margin expansion through pricing actions, service growth, operational excellence, and focused OpEx management. While we've had many headwinds on gross margins, the hard work being done in all these areas above is helping to offset macro factors and we believe will meaningfully contribute to our P&L in the near term once those exogenous factors dissipate. Additionally, we are well positioned to accelerate our growth in APAC and EIMEA while anticipating the recovery of the US market. Looking forward to fiscal year '25, I firmly believe that the new product innovations and service offerings we introduced in fiscal year '24, along with expansion into the value segment, will position us nicely to drive an extended period of top-line growth and profitability. Based on the above, for fiscal year '25, we are guiding to a revenue range of $460 million to $470 million and an adjusted EBITDA range of $27.5 million to $29.5 million. This guidance range assumes the following key factors. Firstly, the US market will begin its recovery in the second half of fiscal year '25 delaying system revenue and associated margin and adjusted EBITDA to the back half of the year. Secondly, China margin deferral due to delayed NMPA approval of the precision treatment planning system to begin releasing starting in Q2 of fiscal year '25 and then normalizing in the back half of the year. Those are key financial highlights. And with that, I'd like to hand the call back to Suzanne. Suzanne Winter: Thank you, Ali. In closing, I'm incredibly proud of our global employees and the progress they have made this year against each of our strategic growth objectives. While we did not grow the way we had planned, we end with very strong fourth quarter performance. We have major regulatory approvals in place, including full Tomo C approval in China and CE Mark for the Helix platform. We have a strong backlog of orders, commercial momentum in the majority of our markets, and strong customer demand for our unique radiotherapy platforms. Additionally, we've navigated a number of macroeconomic factors over the last couple of years, including inflation and foreign exchange headwinds, and remain cautiously optimistic that as these conditions improve, could provide a tailwind to our performance. All of this sets us up nicely to deliver to our guidance of 3% to 5% top line growth and greater than 40% EBITDA for the year and advance our strategic growth pillars into the next phase of execution as we drive to deliver compelling solutions to improve patient outcomes and quality of life for patients diagnosed with cancer or neurological disease. I will now turn it back over to the operator for Q&A. Operator: [Operator Instructions] Our first question comes from Young Li from Jefferies. Please go ahead. Young Li: All right, great. Thanks for taking our questions and congrats on a strong finish to the year. I guess to start just on the guidance. Was curious if you can talk a little bit more about it, how much Tomo C is in the guidance, what are some of the potential upside and downside drivers that can get you to the top end or lower end? And I guess within China, what are the expectations for either anti-corruption impacts or stimulus impacts? Ali Pervaiz: Hey, Young. Thanks so much for the question. I think in terms of overall guidance, maybe starting with the bottom end versus the top end. I think really the two big factors are the recovery and the timing of the recovery of the US market, which would really take us to the higher end versus the lower end that continues to be delayed. So that's a significant factor. And then obviously there's certainly a lot of different macro tailwinds that we continue to track as well. So I think those are sort of the two main factors that really determine the range of our guidance between $460 million to $470 million, the important one really being the timing of the US market recovery. I think overall when you think about our guidance for next year, maybe I could just provide some more color. If you think about revenue, we really think it's going to be a similar first half, second half performance that we've had historically, which is 45% in the first half versus 55% in the second half, which really is related to the demand profile that we're seeing for our customers. I think one thing that is noteworthy in the first half is that we do expect seasonality between Q1 and Q2. Historically speaking, Q1 has been our lowest revenue quarter. Q1 of '24 perhaps was a little bit of an anomaly, so maybe Q1 of '23 is a better representation of how we expect revenue to unfold in the first half between those two quarters. And then also in the back half of the year, Q3 tends to be the lower revenue quarter, and then we obviously have a huge ramp up in Q4, which we experienced this particular year. Okay, so I think that's certainly very important to take into consideration as we think about revenue profile for next year. When it comes to our EBITDA profile, I would say it's somewhat similar in nature to what we experienced in fiscal year '23. And the biggest factor taking consideration over there is really our service margin and our service parts and options. So our overall service margin for the year was roughly 32.9% for the total year. In Q1 of fiscal year '24, it was 43%. So it was 10 points higher than where we actually ended the year. And that was artificially higher because if you recall, we had an ERP implementation that was completed in Q1 of fiscal year '24. And so we actually had almost $5 million of lower parts consumption that then trickled into the remainder of the year. And so it is going to be important to ensure that as we're thinking about Q1, that was a one-off and that's certainly not going to repeat. And so again, that's one factor taken into consideration. Then as I sort of shared within the script, we do expect the China margin deferral to start to release in Q2 of our fiscal year and that's really related to the fact that it is year-end for our JV partner and they're starting to bring a lot of customers online. And they expect the bolus of shipments to occur in Q2 and beyond. And that's when we actually start thinking about the release activity to start to pick up. So I think those are really sort of the way to think about guidance in terms of low end versus high end, and then also kind of how we think about the year on board. Young Li: Okay, great. That's very comprehensive, very helpful. I guess maybe just to follow up, I was wondering if you can talk a little bit more about the contributions from Tomo C in China and we are hearing from the anti-corruption campaign side and anything on the stimulus side. Suzanne Winter: Yes, absolutely. For Tomo C, of course we're all celebrating after a very long time waiting for the final approval to really do a full line production. Certainly our JV partner, very excited. We did ship our first unit to our first customer at the very end of Q4 and now they are working very closely to drive the remainder of the installations based on customer timing in the first half and of course into the back after the year as well. But really we think there'll be a surge in Q2 in terms of the overall installations. I think that the response is very strong. And again, China ended the year very strong on orders, to which we'll translate into revenue over the coming years. So we're very enthusiastic about the potential now that we have this clearance behind us. Just in terms of the anti-corruption campaign, I think there's just lingering sort of processes that have slowed down over this past year, the process. But again, it certainly hasn't hurt us from the results that we are seeing. But we do expect that [something] (ph) is going to be the new normal. So I think our team should sort of build that into their overall forecast that some things are just going to take longer. In terms of stimulus, that is starting to roll out. Again, it's an interest-free loan that the government is providing, and not just in healthcare but many industries, but it's really directed at replacement of older systems. And so, again, our team in China is positioning these customers to be able to try and access those funds. They have not -- we haven't seen it actually initiated yet, but we do expect that probably in the back half of the year we'll start to see some contributions to that, but we have not built that into our numbers until we start to see greater signals. Young Li: All right, great. That's very helpful. Thank you so much. Operator: Our next question comes from Marie Thibault from BTIG. Please go ahead. Marie Thibault: Hi. Thanks for taking the questions. I wanted to follow up a little bit on Japan. I heard that after you exclude the yen headwind, it certainly sounds like strong demand. I think in the past you've said that you expected to see a strong backlog come through in that country. I'm curious if some of that came through in this quarter, and how long we might expect some of that demand to last? Suzanne Winter: Thanks for your question, Marie. Yes, I think that we -- Japan's Q4 did come through with some strong revenue performance. It is a developed market and our -- we've talked about this in the past, the developed markets do not have the same sort of goal phrase as some of the emerging markets. But our Japan team is really going after competitive replacements. They have done just an outstanding job in terms of really going after aged installed base, not only ours, but also our competition. And, again, we've talked a bit about the number two position. But, we think they're on their way to being number one just based on their -- how they're trending at this point. So, again, we look at the Japan team and we think that they are -- they've set a high bar for the other regions just in terms of really how to drive strong customer satisfaction. So, we do expect continued important contributions from that region. Marie Thibault: Okay, that's helpful. And then maybe talking about one of the more emerging regions that has a lot of opportunity. Congrats on the CE Mark for Helix. Can you tell us a little bit more about your plans there in India? Could we expect to see some orders get booked here in this fiscal year? And while we're talking about regulatory wins, have there been any updates from the FDA on Cenos since you submitted the 510(k) last year? Thanks. Suzanne Winter: Yes. Let me talk about India first. We do have to see if there's still a couple more regulatory hurdles in India, but we do expect that we'll be in a shipping position by the end of our calendar year. But we are able to take orders now. So, the good news is we get to actually build a funnel of orders within that region. And you're right, we see a lot of potential in India. And we believe that India has the potential over this coming year to be as big a market as China's potential. Right now, we think it's about $100 million to $125 million market. We think the Helix will play very well there. But meanwhile, we are investing in our commercial footprint in India as well as our back office because we do believe the potential is very strong. And now with Helix, we've got a full portfolio we need to really go out in the market. Just in terms of the regulatory approval on Cenos, that is extended, I think, from what we had originally thought. Again, we had gone back and were having conversations with the FDA in terms of just making sure that we now have the cybersecurity requirements as well as some other requirements around human factors. So at this point, we're planning for a full introduction at ASTRO, but we'll be in a shipping mode probably by the end of the calendar year. So, we do think it will help us to win the new Radixact orders, but the revenue from Cenos will come in the first half of FY '26. Marie Thibault: Okay very helpful, Suzanne. Just to clarify, more regulatory hurdles in India for Helix. Is that things like treatment planning system or something else? Suzanne Winter: Yeah, no. Now we were at CDSCO and it's more of a localization kind of hurdle and what we need to do is make sure that we ship our first order and then we have someone come in and send a local body that does testing on it and then we open it up to greater shipments. Operator: The next question comes from Brooks O'Neil from Lake Street Capital Markets. Please go ahead. Brooks O'Neil: Thank you very much. Good afternoon. I'm just curious if you could give us a little more color on the US market. In particular, maybe a little bit about the competitive environment. Do you feel like you're gaining share or losing share, gaining bunkers, losing bunkers, and what do you think the outlook is for fiscal 2025 in the US? Suzanne Winter: Thanks for your question, Brooks. I would say the US market, when we talk about revenue, we're really talking about the delays that we see our customers having from order to installations and getting the capital treatment priorities to be able to install what we saw over FY '24 was a slowdown of lower priority for radiation therapy. But I think as we go into FY '25, what's playing out is what our customers have been telling us, which is they expect to see some gradual improvement in the back half of the year. They have greater visibility. As a result, we have greater visibility. So we think the back half of the year will start to see a gradual increase and then more of a full recovery in FY '26. In terms of, are we winning? Our orders actually were good in the US, and overall, it was an 8% growth orders. So we think that's very strong. We think it's faster than the overall market growth and that we are gaining share as a result of our strong customer reception to our new product innovation. So, what we're really looking at, and we take a look at the region for the year is what is that timing in order to installation and can we help to accelerate that. And, some of the things, again, is better visibility. The other is making sure that we've got a very robust order to revenue process, so that we work very closely with our customers to help them to get the [indiscernible]. Brooks O'Neil: Great. Let me ask one more. Appreciate the color. Year or two ago, a lot of focus on service, margin improvement, service growth. Would you say if I was listening correctly, maybe I wasn't, but it sounded like most of the service opportunity is perhaps more tied to system shipments, new system shipments. And I guess the question really is, do you continue to see opportunity to drive growth in service and service margin? Thank you very much. Suzanne Winter: Yes, absolutely. I'll start and I'll let Ali jump in here. Yeah, I would say our service results for the year don't tell the full story. I think that we did get some training and some installation revenue that was tied to the Americas installations that we had planned for events that affected our overall service revenue. But what's most important to us is growing that service contract revenue. That's the recurring part of the business. That is 90% of the revenue because these other things are one-time factors. And so at 4.5% growth, we think that that is a significant win. And we think there's still a lot more room for us to grow the service business, not only from an increasing price, but these new service solutions that we talked about like CyberComm, that we can now sell to our CyberKnife customers in a service contract, that's greatly reduced their commissioning time, as well as other value-added service solutions that we can bring to the table and also advanced education. We've made a big investment in our global education center facility in Genolier, Switzerland, Innovation Hub, as well as one in China, we have one in Japan, and we have also invested to expand our training center in Madison. So all of these things, we think we're in the early inning. We're certainly consciously optimistic at the 4.5% growth on the service contract revenue. And we think we've got more to go. From a margin standpoint, I'll let Ali make comments. Ali Pervaiz: Yeah, Suzanne, I totally agree with what you said. I mean, I think, the important metrics that we look at is how is contract revenue growing. That is really representative of most of the annuity part of the service business. I mean, as Suzanne mentioned, that's growing at 4.5% year-over-year and just installer terms that added about $8.5 million of continued revenue into that particular line item. So then you're asking, why is that -- why is service revenue not growing by the same amount? Like Suzanne mentioned, that's being offset by some of the training, install revenue, mostly by lower activity in our US markets. And then also spare parts revenue. And spare parts revenue gets impacted when we actually enter countries for the first time because our distributors are building up their spare parts. And we actually had lower first-in-country activity in this particular year. So I would say that's all mostly timing driven, but it's not a good indication of the fundamentals and performance of our service business. The contract revenue really is, and so that grew 4.5%, which is both an indication of going higher than our installed base, and also the pricing activity that the team has been doing over the last 18 months. So we feel good about the fact that pricing activity is now starting to showcase into the panel. Okay. I think the other element that's important to note is that, we got hit with about $2.4 million of higher part consumption when related to a supplier quality issue. And so really had it not been for that particular one-off, our service margins would have been better by that amount. I think we look at a lot of other operating metrics as well. I think the good news in terms of service parts consumption, which is probably the highest cost our service business bears, is that overall, from a volume of parts consumed, we're seeing a lot of productivity. Where that's being offset is by the impact of inflation. Right? So last year, in fiscal year '23, we had almost about 3% inflation. This year, that grew by about 2.3%. And so again, a lot of that underlying activity the team is doing is being masked by a lot of these exogenous factors. And we do think that once the exogenous factors start to dissipate, not only by themselves, but also through the work that our teams are doing with our suppliers, with our engineering teams, that will meaningfully start to showcase our P&L. So I would say margin expansion builds very much front and center, not only for our service business, but also in just overall cost reduction activity. We did a lot of that in-house activity initially, but now we're actually actively engaging with our suppliers to really utilize them as partners to understand how do we start to accelerate this activity going into fiscal year '25. As a matter of fact, we just had our first supplier summit earlier this month, and that's exactly the type of partnership we're looking for from our suppliers, is how do we continue to reduce the cost that we anticipate our volume to pick up. Brooks O'Neil: Great. Thank you for all of that. Looking forward to coming year. Suzanne Winter: Thanks, Brooks. Operator: [Operator Instructions] And our next question comes from Jason Wittes from Roth Capital. Please go ahead. Jason Wittes: Hi, thanks for the questions. So, in terms of your service revenue and how you're growing it, is that largely pricing initiatives or are just higher take rates on service contracts? I'm trying to understand the mechanics behind the optimism there. Suzanne Winter: Yeah. Well, it's definitely the growth of our installed base. So, we had a strategy of going to emerging markets that would hide growth. Those installations then generate service contract revenue. So that's really the big driver. But we also have -- we're starting to see pricing actions come through the P&L. And so that's also very encouraging. And then we believe that in the future, we'll start to see more contributions to the workplace from new value-added service offerings that are new and could be a source of growth for higher value in what we provide to our installed base. Jason Wittes: Okay, and then if I think about your growth over the last several years, it's kind of mid to high single-digits is kind of in the range. Part of that's half your revenue being service, the other half obviously being capital equipment purchases. But with this new initiative to go after emerging markets and now that you're kind of set up both in China and India, I assume that's all incremental and is that potentially going to push you guys more towards double digit type growth or how do we think about this opportunity sort of progressing over the next couple years? Suzanne Winter: Yeah, I mean, again, I did look at the year. It ended up flat from a revenue perspective, but our international revenues grew by 10%. And so just significant growth. It was really the US that was down significantly. So what we believe is when the US recovers, because we do think it was temporary, then our international growth will be incremental growth that can drive higher overall outlook from a revenue perspective. So that's why, we're being prudent here in our revenue outlook for this next year as we watch to see the US market recover. And again, the US market has tremendous potential because they got aged equipment across the market. There is an opportunity for replacement and upgrades. And so that is going to be the catalyst for the US market. And again, we think this past year was an anomaly of what was happening in the US. And we will continue to watch it to see when, this is the timing of improvement. Jason Wittes: Okay. And then also related to emerging markets, I guess it's my assumption, and you can correct me, that those -- both the product sales and even the services are going to be at a lower margin than your current base, yet you guys are looking to continue to expand margins. So how does the math work with that? Am I wrong about my assumptions about the margins for the emerging markets being lower or is it just economies of scale working its way through the P&L? Ali Pervaiz: Maybe let me take that one. So I would say your comments are actually right. That as we penetrate into the value segment of these emerging markets, we do expect our product markets to be pressured. And as a result, our gross margin will likely stay consistent or be pressured slightly. And the reason I say consistent is because we expect that that pressure on product to be offset by the activity that we're doing on service. And so at gross margin level, it's likely going to be some pressure. But really, I think we're getting accretive on our overall EBITDA, and EBITDA as the percentage of revenue, which is what we're looking to expand. And all of that's really driven by this whole phenomenon of volume leverage, in which the more volume that we have, we don't expect our costs to go up the same way. And that should meaningfully contribute to margins at adjusted EBITDA level. Jason Wittes: Okay, that's very helpful. And then maybe just a quick follow-up. I know you mentioned in the beginning that the guidance range is related to when the US recovers. Just to clarify, at the bottom end of the range is assuming no US recovery or and the top end is assuming a second half recovery or how do we think about that? Ali Pervaiz: The midpoint is assuming US recovery in the second half. I mean the bottom end could be impacted depending upon the timing of that moving around. And then same comment for the top end of that. So obviously something that we are watching very, very closely and we are really getting intimate with our customers that we expect products [can go to revenue with] (ph) and then also obviously we have a continued [pulse of our] (ph) service business over there. So I think just a lot of focus on overall US business but I think that's the right way to think about it. Jason Wittes: Okay, great. I'll jump back in queue. Thanks, and congrats on a solid end to it. Tough year. Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Suzanne Winter for any closing remarks. Suzanne Winter: Thanks very much. This concludes our earnings call. We look forward to speaking again with you in October for our fiscal 2025 first quarter earnings release. Operator: Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.