Paylocity Holding Corporation (PCTY) Q1 2018 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Paylocity Fiscal 2018 First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference is being recorded. I’d like to introduce your host for today’s conference, Mr. Ryan Glenn, Senior Director of Finance and Investor Relations. Sir?

Good afternoon, and welcome to Paylocity’s earnings results call for the first quarter of fiscal 2018, which ended on September 30, 2017. I’m Ryan Glenn, Senior Director of Finance and Investor Relations; and joining me on the call today is Steve Beauchamp, CEO of Paylocity; and Toby Williams CFO of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today’s remarks, including statements made during the question-and-answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. Also, during the course of today’s call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. The non-revenue financial measures we will discuss today are non-GAAP unless we state the measure as GAAP. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to their directly comparable GAAP financial measure because the information, which is needed to complete a reconciliation is unavailable at this time, without unreasonable effort. In regards to our upcoming conference schedule, Steve and Toby will be attending the RBC TIMT Conference in New York on November 7. And Toby and I will be attending the Stifel 2017 One-on-One Growth Conference in Chicago on November 9, and the Mizuho Investor Conference in New York on December 4. With that, let me turn the call over to Steve.

Thank you, Ryan, and thanks to all of you for joining us on our first quarter fiscal 2018 earnings call. I would like to start by welcoming our CFO, Toby Williams to his first Paylocity quarterly earnings call. Toby joined us in mid-September and brings to the team a wealth of experience across corporate finance, strategy and business development. We are off to a good start in fiscal 2018 with total revenue of $81.5 million in the first quarter, an increase of 25.3% versus the same period last year. Recurring revenue grew by 26% driven by new client additions and an increase in average revenue per client as we continue to increase our penetration rates on some of our newest offerings. Broker referrals once again represented more than 25% of new business revenue for the first quarter as we continue to invest in the channel, growing the number of brokers while also creating stronger relationships with current partners. As all of you know, fall is the busiest time of year for our sales force, as many clients target switching providers in January. Overall, we feel good about our sales initiatives entering fall selling season, based on our staffing levels, the investments we have made in enhancing our sales training programs and the momentum in the broker channel. Adjusted EBITDA expanded from $8 million or 12.3% of revenue in the first quarter of fiscal 2017 to $14.6 million or 17.9% of revenue in the first quarter of fiscal 2018. The 560 basis point improvement in adjusted EBITDA was driven by improvements in overall gross margin combined with increased operating leverage as we continue to scale the business. With the strong first quarter performance, we are increasing our adjusted EBITDA guidance for the fiscal year by $3 million, now targeting adjusted EBITDA of 20.2% at the midpoint of our range. We continue to focus on growing the revenue, while at the same time, improving profitability, as we scale. Today, we welcomed more than 1,000 clients to Chicago, as we kicked off our annual three day client conference. Clients are able to choose from more than 80 different breakout sessions across a wide variety of HR topics. We were excited to kick off the conference today with two new product announcement, adding both compensation and survey modules to our HCM product portfolio. Both products will be available to our clients in the first calendar quarter of 2018. Our compensation module will automate our clients’ merit and bonus cycle, providing clients the ability to customize workflow, rules and approvals. Providing a compensation module as part of our overall HCM platform allows clients to easily integrate additional data points from our talent and analytics modules to make the most informed compensation decision. Our new survey product provides the ability for clients to launch a variety of surveys, including new hire, exit or employee engagement surveys. In addition, the module can extend beyond typical HR surveys providing clients the ability to launch completely customized surveys or polls to a targeted group of employees on any topic. The data available from real-time employee feedback allows HR leaders to drive initiatives to improve company culture. Company culture and online reputation are increasingly important in attracting talent in today’s competitive environment. The addition of compensation and surveys to our product portfolio increases our total per employee per year opportunity from $285 to $320, when a client buys all of our available modules. This is up 60% from $200 per employee per year at the time of our IPO in March, 2014. In addition to the most recent new product announcements, we highlighted a number of initiatives on our product road map as we focus on delivering innovative HCM Solutions. We continue to invest in analytics with the introduction of a new dashboard for managing over time and total labor costs. We’re also leveraging Azure as machine learning platform to improve the predictive capabilities of our proprietary algorithm in our Retention Risk Dashboard. We announced a series of product enhancements across all of our categories, including a new modernized scheduling experience in time and labor, improved insights in recruiting and automation to the payroll approval and submission process for some of our largest clients, just to name a few examples. Our product development team had the opportunity to host clients in our product connection zone, soliciting ideas directly from users. We believe that continued investment in our platform will provide both differentiation and additional revenue opportunities. To capitalize on this opportunity, we continue to increase our investments in research and development as total R&D spend increased by 24.3% this quarter when compared to the same period last year. We continue to expand our operational capacity as we phase into our new headquarters in Schaumburg, Illinois. The second phase of our move will be completed in November, and the feedback from our team has been overwhelmingly positive. The investments we are making in creating a modern collaborative work environment combined with first-class amenities positions us to attract and retain the talent we need to grow the business. We’re also very excited to be opening the Peter J. McGrail learning and development center later this month. The learning center will be a 22,000-square-foot floor dedicated to training and educating our most important asset, our employees. I would now like to pass the call to Toby to review the quarter’s results in detail and provide updated guidance.

Thanks, Steve. Before I review the quarter’s results, I thought I’d provide some overall observations from my first handful of weeks here at Paylocity. So I’ve known this business for a long time, and I was excited about the opportunity to join Paylocity because of the culture that Steve and the team have built, the continued investment in developing market-leading products and the focus on client service. So after being here for almost seven weeks, I’ve been really impressed with the culture, the focus on our employees in bringing great talent into the business that’s tangible. And I really believe it differentiates us in the market. The focus on innovation and product development is also impressive. So I spent time with our R&D team and have seen the commitment to developing new products like compensation management and surveys, which we just announced earlier and Steve talked about. And the dedication to providing great client service is another real differentiator for us, which continues to show up in our retention rates. So with all that said, I’ve been really impressed so far, and I’m really excited to be here with this team. So with that, I’ll jump into the results for the quarter. Total revenue for the quarter was $81.5 million, which represents a 25.3% increase from the same period in the prior year. For the first quarter, our total recurring revenue of $78.9 million was up 26% from the year ago quarter and represented 97% of our total revenue. Recurring fees were up 24.8% in the quarter and interest income on client funds was up 125.5% year-over-year as a result of balance increases, increased average interest rates and because we began investing a portion of client funds in high-quality marketable securities during the quarter. Implementation services and other revenue was $2.6 million for the first quarter, up 8.6% from the year ago quarter. As noted previously, implementation services revenue growth can be impacted by our product mix. In general, HCM modules command less implementation fees in the marketplace than payroll, and we have certain products such as recruiting and expense, which do not carry any implementation fees. Our adjusted recurring gross profit on recurring revenues was $58.9 million or 74.7% in the first quarter, up from $45.8 million or 73.2% the year ago quarter, which is a 150 basis point improvement. Adjusted gross profit in the first quarter was $51.1 million, representing a gross margin of 62.7% as compared to $39.3 million or 60.4% in the year ago quarter, which is a 230 basis point improvement. And the improvements we saw in adjusted recurring and adjusted total margin are primarily a result of the natural scale we see in our business. If I turn to our operating expenses, we’ve continued to invest in research and development. In addition to developing new modules and capabilities, we are equally committed to refreshing and modernizing our platform to maintain and extend our technological advantage. In order to understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were $11.5 million or 14.2% of revenue in the first quarter compared to $9.3 million or 14.3% of revenue in the year ago quarter. On a dollar basis, our year-over-year investment in total R&D increased by 24.3%. On a non-GAAP basis, sales and marketing expense was $19.1 million or 23.5% of revenue in the first quarter compared to $16.4 million or 25.2% in the same period last year. On a non-GAAP basis, G&A costs were $12.6 million or 15.5% of revenue in the first quarter compared to $10.8 million or 16.5% of revenue in the year ago quarter, which is a 100 basis point improvement. And we continue to be pleased with our ability to consistently leverage our G&A expenses on an annual basis. On income and loss, our adjusted EBITDA was $14.6 million or 17.9% of revenue for the quarter versus $8 million or 12.3% of revenue for the year ago quarter, which is a 560 basis point improvement. On a dollar basis, adjusted EBITDA increased by 82.5% over the first quarter of last fiscal year. Non-GAAP net income was $8.2 million or $0.15 per share for the quarter versus $4 million or $0.07 per share in the year ago quarter. Briefly covering our GAAP results. For the quarter, gross profit was $46.5 million, operating income was $500,000 and net income was $500,000. As we demonstrate GAAP profitability, we will continue to assess the factors relating to maintaining or leasing our valuation allowance on a quarterly basis. If we continue to demonstrate GAAP profitability, it is reasonably possible that we may release all or a portion of our valuation allowance in the next 12 months, which will impact our effective tax rate. While we cannot currently provide more detail on the timing of any potential valuation allowance or lease or any corresponding impact on our future effective tax rate, we will continue to assess these items on a quarterly basis. With respect to the balance sheet. We ended the quarter with cash and cash equivalents of $97.4 million. And from a cash flow perspective, we generated $8.2 million in cash from operating activities in the first quarter of fiscal 2018 as compared to $1.9 million for the prior year first quarter. Finally, I’d like to provide our financial guidance for the second quarter and updated guidance for fiscal 2018. For the second quarter fiscal 2018, total revenue is expected to be in the range of $84.3 million to $85.3 million or approximately 23% to 24% greater than the prior year. Adjusted EBITDA is expected to be in the range of $12.5 million to $13.5 million. Non-GAAP net income is expected be in the range of $6 million to $7 million or $0.11 to $0.13 per share based on approximately 55 million diluted weighted average common shares outstanding. For full year fiscal 2018, total revenue is expected to be in the range of $368.5 million to $370.5 million or approximately 23% greater than the prior year and an increase of $0.5 million from our previous guidance. Adjusted EBITDA is expected be in the range of $74 million to $75 million, an increase of $3 million from previous guidance. And when we completed our IPO in March of 2014, we stated a long-term goal of 20% plus adjusted EBITDA margins. And I’m pleased to report that we expect to achieve this goal in fiscal 2018. We likewise remain confident in our ability to drive further leverage in our business model. Non-GAAP net income is expected to be in the range of $46 million to $47 million or $0.84 to $0.85 per share based on approximately 55 million diluted weighted average common shares outstanding. This updated guidance reflects an increase of $3 million or approximately $0.05 per share from our previous guidance. Operator, we’re now ready to begin the Q&A session. Thank you.

Thank you. [Operator Instructions] Our first question is from Justin Furby with William Blair & Company. Your line is open.

Thanks, gusy. And Toby, welcome aboard. I guess, maybe to start with Steve in terms of the quarter itself. I think, obviously, ahead of your guidance. But I think, it’s a smallest beat you’ve had since you went public. And I guess, I’m wondering if there is anything to call out in terms of linearity or market dynamics? I asked it partly because I think one of your competitors this week talked about hurricanes having some impact. I’m wondering if you saw that at all in the quarter or any more commentary there would be helpful? And then I’ve got one quick follow-up.

Sure. Yes, I understand the question about the hurricanes. Certainly, we saw some impact in terms of the activity in Texas and Florida. We didn’t feel it was enough to necessarily call out in our formal remarks. But we’ve got sales teams down in those areas, and there was – what I would call, would be a pretty minor impact. But I think for the quarter as a whole, we’re definitely happy that we were able to raise guidance slightly, it was a bit smaller beat than what we’ve had historically. But I think as the numbers get larger than narrowing the beats is pretty common. We got a lot of great activity going on in the sales force. This is really selling season right now. So we’re going to have a much better assessment in terms of how our sales force is doing from a productivity perspective as we get through January. As you would probably know, many of the clients like to start in January. We went in fully staffed, rolled out the training program. So I think good progress in the quarter and really feel good about where we are for the year.

Got it. And then can you give an update on as you and Paycom and Paycor all get bigger sort of – just rough feel of how often you run into them in deals? Are we at the 15%, 20%, 25% level? And I think at your user conference today, Steve, in your keynote, you gave some comments around just letting people know your presence at the upper end of your target market. And I’m wondering if you are starting to see your sales reps gravitating more towards that upper end? And how that impacts the competitive dynamics?

Sure. So I’ll start with a first part. The competitive dynamics, I don’t think, we’ve seen a big shift in that. We still get roughly 50% of our business from ADP and Paychex in combination. I think it’s natural that we’ll continue to start seeing Paycom and Paycor a little bit more as all three companies grow. I’m not sure I’d be kind of comfortable giving you exact color on the numbers. I’d have to go back and look at that to be honest with you. But I think the concept is, as we all grow, we’ll see each other a little bit more. But I wouldn’t say, there’s really a whole different from a competitive dynamics perspective. In terms of our market focus, our average customer last year was 120 employees. It hadn’t moved from the year before. I think that tells you we’ve been staying true to the core market. But I would say is, we do have a lot of customers at the upper end of our segment, so certainly in that 500 or 1,000 space. And as we continue to make investments in R&D, we will attract customers beyond that 1,000 employees. And many of those customers beyond that were at our conference today. I wouldn’t say, it’s a change in market focus. It’s just the fact that, as our product gets a little bit richer, we become a little more competitive. But I think the key point is, we’re staying focused on the market that we’re in and continue to gain success with mid-market customers.

Got it. Thanks very much.

Thank you. Our next question is Corey Greendale with First Analysis. Your line is open.

This is Ken Wang on for Corey. Congratulations on a great quarter. I’m just wondering the new modules you discussed in the opening keynote at your customer conference today, are you intending to try to focus on selling these back into the existing customer base? Or is this really just more of a new customer attach focus?

Sure. I think with any new product, what we typically start with, as I talked about today, using the product ourself and getting comfortable with that. We then roll it out to some early adopters, which we’re in the process of doing. And then it’ll be generally available as we turn the calendar year in the first quarter, and so we’re right in that process right now. And once we make it generally available, we typically start with new sales and train our sales organization, make sure that they’re marketing that actively. And then we do have a team that does focus on selling back to the client base, so we will make those products available to those teams and start scaling that. And so the way we think of selling more products to new customers versus inside is, we will gradually see increases in sales back to the current client base. I think that’s going to happen gradually both from our existing customers – sorry, from our existing sales reps as they visit customers as well as the inside sales team. So I think it’s going to be a combination of both.

Perfect. Just one more from me. Any updated thoughts on ACA at this point?

So I think, we’re actively working with our customers to make sure that they are ready for ACA filing. That’s going to happen again at the end of January. And there’s a lot of conversations with the customers in terms of being ready to make those filings. We’re in a great position from a product perspective and having the experience to do so. We don’t see anything at this point in time on the legislative front that’s imminent that would change that. So – and we’re also seeing clients continue to adopt the really compliance package, which has – which includes the ACA filing. So from our perspective, business as usual.

Thanks a lot and congratulations again.

Thank you.

Thank you. Your next question is from Pat Walravens of JMP Securities. Your line is open.

Hi, thanks for taking my question. This is actually Matt Spencer on for Pat. Can you just talk a little bit about what you’re seeing in terms of new customers? And what implementation time lines look like?

Sure. So what I would tell you is, our implementation time frames have not changed. So that’s kind of been also business as usual. For the average-sized customer, 120 employee customer takes us three to six weeks to implement. It could be at the low-end of that if they’re a little bit smaller. As they get a little bit larger, it can take a little bit longer. But I think the key point is, we’ve been consistently running an integrated implementation process across all of our products and the time lines really have not changed for us.

Perfect. And then can you just – excuse me, you launched that recruiting product back in January. Can you just give us an update on the traction you’re seeing there?

Yes. So we don’t give the exact numbers in terms of how many people adopt of the module. And part of the reason is, we sell a lot in bundles and so clients like to buy entire bundles and so recruiting is certainly part of our HCM bundle that we offer. But we continue to see the increase in average revenue per customer driven by some of these new products. Expense and recruiting being the most recent examples. And obviously, our hope is, we’re going to have similar results with compensation and surveys.

Thank you very much. Helpful.

Thank you. Your next question is from of Eric Lemus of SunTrust Robinson Humphrey. Your line is open.

Hi, guys. Thanks for taking my question. Nice to having the quarter. Question on the channel partnerships. As we look, they’ve been a pretty strong revenue contributor over time, but has come down slightly as a percentage of revenue. So as we look forward, do you expect that the sales from channel partnerships to remain stable, come down or increase? And then furthermore, when you invest in that channel, are you investing more so in more channel partnerships? Or going deeper with your current relationships?

Sure. So I think if you go back to the time that we went IPO, we were getting about 25% plus of our business from broker referrals. That really continued to be the case post-IPO until ACA was first being implemented. We saw that spike almost get very close to the 40% level and then last fiscal year, started to tick back down into historical range. And so we’ve been 25% plus for the last several quarters, very consistent with our historical range post-IPO. So I don’t think if you look at it over the long enough period of time that it’s really come down. It’s actually been fairly consistent absent the one spike for ACA. As we think about investing in that channel, we think about both. We want to add new brokers to the Paylocity partnership, and at the same time, we want to be able to get deeper relationships with the current brokers. And I think a lot of our investments are also tied to our product. Our broker portal continues to gain traction. We ask – many of our customers will give access to the brokers to certain data that allows them to be more effective in doing their job. And so we’ll continue to invest in that channel for us and feel good that it’s been pretty steady for the last several quarters.

Okay. Great. That’s excellent color. And then just next question, just want to verify. The $320 per employee per year, that is inclusive of the two new modules, correct?

Correct. That is inclusive of the new – two new modules.

Okay, great. Thanks, guys.

Thank you. Your next question is from Shankar Subramanian of Bank of America Merrill Lynch. Your line is open.

Hi, thanks for taking the question. First question is on just the EBITDA margin, long term. You talked about the leverage in gross margin and the operational efficiency, you are at 20%. Can you talk about where you can get to long term? Is it too early to say that? But if you can give us a qualitative color around it.

Yes. So, I think, at the time that we went public back in 2014, we had kind of a long-term range of being 20% to 25% on adjusted EBITDA. Our current guidance allows us to cross that 20% number assuming we execute to that, and so that’s certainly a milestone. I think our thought process is, it doesn’t have to necessarily stop at 20% to 25%. We’re going to see where we end up this year, reevaluate that going into next year and likely come up with where we think long-term range – a new long-term range looks like at the end of this year. We also will be implementing 606 accounting rules for next year, so that has an impact as well that we’ll kind of factor in that. So I think by the end of this fiscal year, we’ll give you better thoughts on it. But I think the important point is, we don’t think that 20% to 25% is where it has to end. As we continue to scale and grow the more business, get more operating scale, then it’s certainly possible that we can think of a range that goes beyond the current long-term range.

Perfect. As a follow-up to the revenue guidance, it seems like the sales productivity improvements, if you consider some improvement this year versus last year, you can actually do a little better in the revenue side. So I’m just trying to see is it more conservatism in terms of sales productivity that’s leading you to guide 25% growth rate for revenue? And follow-up to that is, what range of customer growth versus revenue growth – customer – revenue per customer growth that you are assuming in that guidance?

Okay. So I think the first part of the question is, ultimately, the sales productivity is certainly a driver from a revenue perspective. And so if we were to get improvements in sales productivity then there certainly is always an opportunity for over performance, it’s certainly a key focus for us. I think it’s a bit of a different world post-ACA because ACA had kind of a boost on top of it. And so we certainly saw some progress towards the back half of the year, and we’re focused on continued progress this year. So it’s definitely a focus for us. But beyond that, I probably have kind of no additional color. I think go back to the point, we’re in selling season right now and it’s an important time of year. We like the position going in, but we’ll have much better sense kind of post-January. I think – then remind me the second part of your question?

Just the split between customer growth versus revenue per customer growth?

Sure. Yes. I think it’s important to note that we provide quotas to our sales organization based off annual new recurring revenue. And so we don’t necessarily have specific targets around how many customers that we bring on. But I think, if you look at our history and you take the actual revenue growth, we typically have had a little bit more unit growth than we have had ARPU growth, if you take out the one year with ACA – when ACA was launched. And so I would just point to that history as the best way to think about the future simply because we don’t quota on units.

Got it. And one last question, if I may. You mentioned larger than 1,000 employee customers came to your conference. Can you kind of share with us any feedback from those customers? What they were looking for when they came there? And any feedback on what they took away?

Sure. Yes, so I think there’s three key themes that we shared at the conference. And I think this is very relevant for the larger customers as well. So one is a theme around analytics and really trying to drive actionable insights to our customers based off the data that we have in the system. And we launched a number of enhancements that we think will help our customers become more efficient. I think secondly, they’re looking for technology automation. They’ve got a lot of manual processes some of these customers. And when they come to us, they’re really looking to become completely paperless, involve the supervisors in the process, involve the rest of the HR leaders and become more efficient. And then, I think, lastly, the changing demographics of the workplace. The millennials, the next generation of workers coming in are really demanding a different type of communication, a different type of engagement. And so that was a third part of our key theme was using our platform to really engage and communicate with that next generation, so that they are able to drive the right culture in their organization. And so when we build product, we try to tie all of our initiatives to one of those key themes.

Perfect. Thank you so much.

Thank you. Next question is from Ross Macmillan of RBC Capital Markets. Your line is open.

Thanks a lot and welcome Toby as well. Maybe for you Steve or Toby first. Just you obviously beat Q1 EBITDA by almost 600 basis points, and I think the guidance implies that your EBITDA margins will be flat year-over-year for the next three quarters. I understand there could be some conservatism, but is there any sort of areas of major investment that you’re, sort of, leading into for the remainder of this year that we should be thinking about?

Yes. No, there is probably not any specific area to call out. But I think more generally what you see in our history is, Q1 is a time where we’re ramping up hires kind of going into year-end. And the timing of those hires sometimes can have an impact in terms of Q1 adjusted EBITDA. So I would tell you that, that ramp in hiring is something that we stay focused on. We want to be fully staffed into year-end. And if it takes us a little bit longer to get some of the hires onboard, we get a benefit in Q1. It doesn’t always necessarily carryover for the year. So I think that’s probably the only thing to call out that we had a little bit of that in the quarter, and we would anticipate being kind of fully staffed as we move through the balance of the year.

That’s helpful. Steve, maybe just another one for you. So ADP, I think, today talked about like 160 basis points improvement in churn, and I think the comp was easy. But I’m just curious, when you see their numbers and that sort of change in churn is up or down, does that ever factor into sort of what you see in market? Or is what you see in market relatively consistent?

Yes. I wouldn’t have any separate call out, as I look at this past quarter or even a longer range. I think ADP is a very large organization in multiple different market segments. And I think small changes in their churn rate up or down, we don’t necessarily feel.

Yes. And then I got a last one. Just you’ve introduced those new products which are taking up the PEPM or the PEPY nicely. You’ve historically had this sort of realization rate something in the, I think, 60%, 65%. Just remind me, is there any lag that we should be thinking about in terms of getting to that sort of realization rate? Or – because you’ve got this perpetual cycle of products that have been introduced and are ramping? So what’s the right way to think about that realization rate relative to potential?

Yes. So I think, we’re going to have the products generally available in first quarter of calendar 2018 or third fiscal quarter. So we are announcing them a little bit early, so there is a little bit of a lag there, certainly. And then what we typically look at is, within one or two years, we’d love to get into that 10% plus penetration rate across our customer base, a lot of that comes from selling new customers. Some of it comes from selling back to customers. That’s kind of the goal we have. Based off my history with different products, they ramp at different rates. We definitely have – see the need for both of these new products in the client base and are focused of that. But I think if you wanted an idea in terms of what we think would successful would be, we try to get that ramped up to 10% plus – 10% to 20% range as quickly as possible, and we’ve been able to do that successfully in the past.

Great. Thanks a lot. Congrats, again.

Thank you.

Thank you. Your next question is from Siti Panigrahi of Wells Fargo. Your line is open.

Thanks for taking my question. Just wanted to drill into the last question on the EBITDA margin side. You raised your revenue by $0.5 million or EBITDA like 70 bps and gross margin solid improvement, 200 bps. And also sales marketing growth is 16%, 17% in last two quarters. I mean, is that the trend we should see going forward in our sales marketing side? And also, where should we see more operating leverage? And I just have a follow-up.

Okay. So I think from a sales and marketing perspective, you can see that more around quarter-by-quarter based off when we have certain initiatives roll out whether those are things like a training initiatives and meetings where we’re bringing larger groups together, whether there’s shows that we might be attending. And so the marketing spend, obviously, has some variability around timing. I mean, the rest of the spend, obviously, is a little bit more tied to the sales productivity and the commissions that go along with that. So depending on the strength of the quarter, that would be another factor. So I think you can see that I wouldn’t necessarily say that a 16% increase in sales and marketing would be something that I would tie my hat to. It just depends on the productivity that we have in the various marketing initiatives that we roll out. I think from an overall leverage question, we certainly see an opportunity for continued gross margin leverage as well as an opportunity to get G&A leverage in that operating leverage, that’s probably the most natural area to be focused on as we move forward.

All right. And then on the competitive landscape, I mean, you guys have been investing as well as your competitors. Just wondering, are you seeing anything different in the market? And what’s actually make you win? I mean, ADP talks about investment as well. So what makes you win against ADP and other competitors?

Sure. I do think it’s the reason that most customers will come to us is really the strength of our platform. We’re able to demonstrate them a combination of a fairly robust feature set for the marketplace that we’re in, a fairly efficient implementation process, which is important because these customers don’t often have a lot of resources. And then a great user experience for not only the administrators, but also every supervisor and every employee. And so when you’re able to put that combination of factors together, it really is kind of the key. The winning formula is about ease of use, feature set that is robust enough to automate everything that they’re looking for and then being able to implement them in an efficient fashion. And I don’t – I would tell you that, that has been the same key to success for many years for us.

Thank you.

Thank you. Next question is from Brian Peterson of Raymond James. Your line is open.

Thanks. This is Vince Celentano on for Brian. I was just hoping you can give us update on hiring trends. Has there been any changes so far in this fiscal year?

Hiring trends within our client base? Or our own hiring trends?

Your own hiring trends?

Yes. I think from a sales and marketing perspective, we try to be – try to make sure that we go into selling season fully staffed. I think we announced on our last earnings call that we’re able to achieve that. So we were able to increase sales and marketing reps 25%. And we don’t do a lot of hiring until we kind of get to the spring time frame when we set targets for next year. I think I just made the comment a couple questions ago that first quarter for the other teams is a big hiring time for us, think of all the operational jobs that we’ve got. And so we were probably just a little bit behind our plan in terms of getting fully staffed, and we got some of that benefit into EBITDA. But we feel like we’re going to be in a good position going into this – next quarter and the balance of the year.

Okay. Perfect. Looking at the services gross profit margin this quarter, it looks like it took a bit of a step back. Can you give any color on going forward if you’d expect this to improve and just the overall outlook for this – for these margins?

Sure. So I think if you look at the services line, we generally charge our customers an implementation fee for coming onboard and that implementation fee is really kind of market-based pricing, based off what they’re buying. One of the trends that you can see in that number is, the more HCM modules we have, the more self-configurable that can often be. But they often don’t necessarily have implementation fees. And I think Toby made that point in the prepared remarks. So those things can move around a fair amount. I don’t necessarily think that big improvements in implementation margin is kind of an area of focus. I think, we – like everything, we can get a little bit better gradually over time. But I think it’s important to understand the revenue mix, the more products penetration we get on the HCM side, the less revenue opportunity. There’s also some other stuff in there that moves around like we do collect sales and so on and so forth. So I think longer term, over time, we can potentially have small impact to that. But I think there is a bigger opportunity on the recurring gross margin than the implementation margin.

Okay, great. Thank you very much.

Thank you. Our next question is from Jeff Van Rhee from Craig-Hallum. Your line is open.

Great, thanks. Just two from me. With respect to the compensation module, maybe if you could just touch on – as you look at the opportunity there, what does the customer base have in place as it stands now? And obviously, going to the sort of how greenfield of an opportunity is that? And then I have one to follow-up on that?

Yes. So I’ll give you an example. So when we introduced the compensation module at client conference today, and I made that announcement, I asked the audience to raise their hand if they, most of them used or how many used Excel to accomplish the annual American bonus cycle. And I would certainly tell you that more than half of the audience raised their hands in terms of using Excel to manage that. So we think it’s a pretty big greenfield opportunity. It’s one that – we used the compensation module ourself this past year. And prior to that, we managed a lot of it from Excel. So I think it’s pretty common to be able to manage this manual. And I think, this really gives a great opportunity to automate that entire process.

Yes, makes sense. Okay and the last one from me just with respect to customer support organization. Any meaningful changes to structure? And just any color with respect to your measurements of customer satisfaction with that support organization?

Sure. So we certainly go back to the fact that we continue to have greater than 92% revenue retention, and that’s been consistent since we’ve gone public and even prior to then. So consistent delivery back to the customers. I think the only thing that I would kind of call out is, we continue to make investments from a technology perspective. Our response times are as fast as they’ve ever been with our customers. We’re getting good feedback from our customers in terms of our ability, and that’s translating to consistent retention. And as we get larger, it does allow us to segment a little bit based off the type of customers that we have. So looking at the larger customers versus smaller customers are the ones that use more product. And so we’ve certainly been able to do that as we continue to scale. But what I would tell you is just a philosophy of continual improvement. And that has always been the case for us within our service organization. And I think we’ve got some great initiatives within service that will allow us to be able to focus on maintaining that 92% plus revenue retention.

Sounds good. Thanks for taking my questions.

Thank you. Our next question is from Brad Reback of Stifel. Your line is open.

Great. Thanks very much. Steve, as you begin to look at some of these bigger deals maybe more consistently, what types of things do you need to put in place to manage the challenges the sales force may have especially, around bigger deals taking longer to close and maybe getting distracted away from the bread-and-butter?

Yes. No, it’s a good question. I think if you go back to the implementation, we typically implement in three to six weeks. Some of these larger deals, which again, certainly happen, have always happened for us, can take a little bit longer than that three to six weeks, but that’s always been the case. And so one of the things that we do is, we make sure that our most experienced people are working with our largest customers and that’s the case in implementation or service, and we try to do some segmentation so that we have our most knowledgeable folks dealing with these largest customers. And then, we also try to get best practices from those customers and share those with new customers as we bring them onboard. So what I’d tell you is, the more large customers that we have the opportunity to interact with then the better we get at it. And we are able to then focus teams specifically at that opportunity. And this is something that we’ve done over the last few years and gotten much better at. So I don’t think there is any big change that we have to make. It’s a slightly different process, we leverage all the same tools. We just want to do that with our most experience folks because they are the ones qualified to handle the complexity.

Great. Thanks very much.

Thank you. Our next question is from Mark Marcon of R.W. Baird. Your line is open.

Good afternoon, congratulations. Wondering if you could talk – just a follow-on with regards to some of those – the comments on the larger customers. Is that a purposeful targeting? Or is it just word-of-mouth in terms of your reputation spreading? And getting some that come across the transom that you weren’t specifically going after originally?

Sure. So just to be clear, we don’t have more larger customers today as a percentage than we had three or four years ago. So there isn’t necessarily, at this point, a really targeted effort at that. However, because we’re much larger, we’ve had much more brand recognition, broker referrals, longer tenured reps in the marketplace, we do run into these opportunities more simply because we’re larger. And because we’re larger, we’ve been able to become a little bit more effective at dealing with those more complex organization. So I think there’s definitely some positive trends with these larger customers, but I don’t want to give you the impression that at this point in time, that that’s kind of a separate focus for us.

Got it. Appreciate the clarification. And then, apologize if this was asked earlier. But did you see any sort of regional differences, any impact from the hurricanes or anything like that?

Sure. Yes, I think I got asked that question earlier, but I’ll reiterate the answer, which is, not enough that we wanted to call it separately. Certainly, we have sales teams in Florida and in Texas, and those sales team certainly had some impact. We could see that. But I think if you look at it in aggregate, it wasn’t necessarily worth calling out. Certainly impacted those teams, but nothing that we would try to put a number on.

Okay. And then, again, if this has been asked, I apologize, and I can follow-up offline. But on the broker channel, how are you thinking about that over the next couple of years? What sort of efficiency are you seeing out of that channel at this point?

Sure. So once again for the quarter, we’ve been above 25% in terms of new business revenue from brokers. Certainly getting into that same historical range for now, many quarters in a row, we definitely feel good about that. We’ll continue to invest back in the channel both to attract new brokers and try to get deeper relationships with existing brokers. So I would say pretty solid execution in the broker channel.

Great, thank you.

Thank you. At this them I’ll turn the call to Mr. Beauchamp for closing remarks.

Well, I’d like to thank all of you for your interest in Paylocity and special thanks to all of you who actually attended our clients conference today. It’s been just a fantastic day, a great event, and we’re looking forward to wrapping that up tomorrow with our more than 1,000 attendees. Thank you very much.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes your program. You may now disconnect. Everyone, have a great day.