Good day, ladies and gentlemen and welcome to the Paylocity Holding Corporation’s Third Quarter Fiscal 2018 Results Conference Call. [Operator Instructions] As a reminder, today’s conference maybe recorded. I would now like to introduce your host for today’s conference, Mr. Ryan Glenn, Senior Director of Finance and Investor relations. Sir, please go ahead.

Good afternoon and welcome to Paylocity’s earnings results call for the third quarter of fiscal 2018 which ended on March 31, 2018. I am 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 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today’s remarks and this discussion, including statements made during the question-and-answer session, contains 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 reconciliation is unavailable at this time without unreasonable effort. In regards to our upcoming conference schedule, Toby and I will be attending the SunTrust 2018 Internet and Digital Media Conference in San Francisco on May 8, Steve will be attending the Baird Global Consumer, Technology & Services Conference in New York on June 6 and Steve and Toby will be attending the William Blair Growth Stock Conference in Chicago on June 12. With that, let me turn the call over to Steve.

Thank you, Ryan and thanks to all of you for joining us on our third quarter fiscal 2018 earnings call. We had a very good quarter with total revenue of $113.4 million, an increase of 25.6% versus the same period last year. Recurring revenue grew by 25.7% driven by new client additions, improved HCM product penetration and an increase in interest income on funds held for clients. The third fiscal quarter represents our largest quarter of new client starts as many companies prefer to switch providers at the start of a calendar year. We were pleased with the volume of new sales in the quarter and the execution by our implementation teams in onboarding our new clients. We also continue to generate more than 25% of our new business revenue from the broker channel, which has remained consistent over the last several quarters. Our sales performance for the quarter was a key factor in our ability to increase revenue guidance for the fiscal year by $4 million, our largest increase in the last two fiscal years. Adjusted EBITDA in the third quarter was $35.8 million or 31.5% of revenue, expanding from $26.8 million or 29.7% of revenue in the third quarter of fiscal 2017. As a reminder, the third fiscal quarter is our highest margin quarter due to the recurring fees collected for W-2s and annual tax form filing. Calendar year ended a very busy time of the year requiring significant operational planning and coordination to handle the increased volume of client interactions. We continue to make investments in a variety of cross-functional process improvement initiatives, which has allowed us to improve the client experience as we continue to grow our product portfolio. These investments, along with our continued focus on product innovation, have allowed us to consistently maintain revenue…

Thanks, Steve. Total revenue for the quarter was $113.4 million, which represents a 25.6% increase from the same period in the prior year. For the third quarter, our total recurring revenue of $108.6 million was up 25.7% from the year ago quarter and represented 96% of our total revenue. Recurring fees were up 24.1% in the quarter and interest income on client funds was up 161.2% year-over-year as a result of balance increases, increased average interest rates and because we are currently investing approximately $100 million of client funds in high-quality available-for-sale securities. Implementation services and other revenue was $4.8 million for the third quarter, up 23.3% from the year ago quarter. Our adjusted recurring gross profit on recurring revenues was $86 million or 79.2% in the third quarter, up from $67 million or 77.6% in the year ago quarter, which is a 160 basis point improvement. Adjusted gross profit in the third quarter was $79.6 million, representing an adjusted gross margin of 70.2% as compared to $61.7 million or 68.3% in the year ago quarter, which is a 190 basis point improvement. If I turn to our operating expenses, as Steve mentioned, we continue to make significant investments in research and development. And to understand our overall investment in R&D, it’s important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were $12.4 million or 10.9% of revenue in the third quarter compared to $9.9 million or 11% of revenue in the year ago quarter. On a dollar basis, our year-over-year investment in total R&D increased by 24.6%. On a non-GAAP basis, sales and marketing expense was $24.4 million or 21.5% of revenue in the third quarter compared to $19.5 million or 21.6% of revenue in the same period last…

[Operator Instructions] Our first question comes from the line of Justin Furby from William Blair. Your line is now open.

Thanks for taking my questions guys and congrats on a nice quarter. I just had two questions I guess both for Steve. First, could you give an update on sort of last quarter you mentioned you wanted to pull forward some sales hiring can you give a sense on where that stands versus a year ago? And then I’ve got one quick follow-up. Thanks.

Yes. So, if you remember we typically start our hiring process in the spring for next fiscal year. Last quarter, I called at the fact that we would like to get a little bit of a jump on that, call it a month or a matter of a few extra weeks, which is always helpful for us. I think overall, I think the important point is we feel good about where we are today from a hiring perspective going into next year and we will give more color in terms of number of reps on our next call.

Okay. And then I guess just more big picture, I was wondering if you think about today and sort of your growth rates in the mid-20s and you compare it to a few years ago before ACA when you are sort of high 30%, 40% grower on a much smaller base. I guess I was wondering if you think it’s any harder or easier to grow today versus a few years ago? And then I guess some of the factors I am thinking about when I asked that are competitive changes, your product and how it’s evolved and any other things that come into play? Thanks.

Yes. So, I think it’s always been a competitive environment. So, there is no difference from my perspective today in terms of we have always – competing on deals has never typically been just us in a deal. So, I don’t think that’s really a lot different. Certainly, with size and scale from a percentage perspective, it does get harder to grow at the same rate over time, but we feel really good that there is a big enough market opportunity, we have got the right product and that we can stay focused on growing 20% plus, which has ultimately been our long-term model. But we have actually posted three quarters in a row with 25% growth, which also makes us feel good. So big enough opportunity, the right products and so we feel we will stay focused on 20% plus as we move forward.

Got it. Thanks very much.

Our next question comes from the line of Scott Berg with Needham & Company. Your line is now open.

Hey, Steve and Toby. Congrats on a nice quarter as well. Two brief ones from me. First of all, Steve, can you talk about maybe the BeneFLEX acquisition a little bit now that you have had it in your hands and you have a chance to look at the operations under the cover a little bit, but kind of curious to know about the sales motion, how it gets sold now, is it any different than your first assumption? Is it all going to be up-sell, maybe changes in pricing or something?

Yes. So I think we are still early in the integration process and we are really focused on developing a solution that will be completely integrated into our platform. So, our vision is that an employee would be able to log into mobile or into our portal, they would be able to see their HSA or HRA or FSA balance. They will be able to see that kind of as they are walking into the pharmacy and point-of-purchase and know exactly how much money they have to spend. We think that’s a key part of the value proposition. So we are actively working on product. At the same time, we are finalizing a go-to-market strategy and have included the headcount we need in our hiring plans during our normal sales hiring spring timeframe and so both of those things are in motion and we hope to give more color as we get through the integration in terms of what that launch strategy looks like. But right now, we are really focused on integration.

Great. My follow-up question would be on you mentioned seasonal nature of Q1 you get a lot of customers that want to go live at the first of the year. But did you see any changes in those customers in terms of the modules that they are buying, how that they are buying, anything that might be interesting to note?

Yes, sure. I think we continue to get more adoption across our HCM components. I think that’s been happening for the last several years. I think one of the things I called out last earnings call is we are starting to see that even down market where we have a number of customers below 50 employees and we are seeing greater adoption from our smaller clients in our target market all the way to the top end of our target market. And we are certainly seeing really good traction with many of the talent management modules that we have released and that, along with benefits, have been big contributors in terms of driving higher adoption.

Great. That’s all I have. Thank you.

Thank you.

Our next question comes from the line of Ross MacMillan with RBC Capital Markets. Your line is now open.

Thanks so much. Steve, you had mentioned last quarter that you had seen a bit of a modest, but slight bias for your sales reps to sell a little more down-market in the first half of the year. And I was just curious now that we have got another quarter behind us, was there any notable change in that, anything to call out there?

Yes. So, I think it’s important to note that our sales reps are driven off annual quota of reoccurring revenue and so there is no unit quota focused to it. And so our sales reps will kind of focus on where they see the best opportunity and that does move around quarter per quarter. I think the important point was to call out the fact that we are seeing broader adoption of our HCM products down-market. So we think our solution is resonating even more than maybe it has in the past. Some of these newer modules are being adopted by 30, 40, 50, 60 employee customers at a higher rate, which we think is great. And that in some way has resulted in the slight mix shift, which you will see as we report our year end client numbers next quarter, but it’s pretty slight. And so I would say nothing major to call out. We feel good about the quarter. We feel good about the sales performance in the quarter and this is just a mix shift that we have seen throughout this fiscal year.

That’s helpful. And then just maybe a clarification from me on your customer float and you said $100 million in available-for-sale securities. I wasn’t clear if there was any change in the investment strategy on the float with regard to money market sweeps or other items that you are trying to call out there, maybe just a clarification? Thanks.

Hey, Ross, it’s Toby. No change there at all. I mean it’s pretty much the same as it was last quarter in terms of the split between what’s invested in available-for-sale securities, no change in strategy, whatsoever.

Great. Thank you. Congrats.

Our next question comes from the line of Brian Peterson with Raymond James. Your line is now open.

Thanks. This is Vince Celentano on for Brian. I just want to know do you see any increased interest from new broker partners looking to partner with you relative to prior periods and how penetrated do you think you are into a potential broker network?

Yes, I think I called out on the prepared remarks that we were once again over 25% of our business comes from brokers. That was for the quarter and for the year. And I think if you go back it’s been pretty consistent for the last several quarters. And obviously, we continue to grow the business, so that does require us to add new broker partners and then continue to deepen the relationship with the existing partners. We think there is still a great opportunity in the broker channel. They are definitely looking for technology partners. It’s an important part of their value proposition. And so we still think this is a great opportunity for us going forward.

Okay, great. And then I just want to get any thoughts on the linearity of the bookings profile that are worth noting?

Well, I mean I think what I have said in the past is when I get the questions about bookings is you can kind of look at the results that we posted. And typically, the variations come from our sales organization. So, our ability to have the largest raise that we have had in the last 2 years and be able to raise revenue guidance by $4 million means we definitely had a good quarter to be able to do that. And there is times where we kind of meet expectations and that means we got to have a decent quarter from our sales organization to meet expectations. So, I think my color would be good last quarter and biggest raise in the last 2 years tells you we are pretty comfortable with it.

Okay, great. Thank you very much.

Our next question comes from the line of Pat Walravens with JMP Securities. Your line is now open.

Hi, this is Matt Spencer on for Pat. Thank you for taking my question. What areas of HR software do you not address today that you think you might be addressing in 3 to 5 years?

Sure. So I think if an organization were to buy all of our product portfolio, they would pay us about $320 per employee per year. As a frame of reference, that’s up from $200 per employee per year at the time of IPO 4 years ago. And so we continue to develop new products. We continue to focus on organic development of those new products. We don’t give specific targets in terms of what that number might ultimately be. We definitely think there is room for enhancements there. We are actively working on integrating the HSA and HRA into that and that’s going to be a bump on the total available sale opportunity. But I would tell you that I think there is new product addition opportunities in pretty much all categories, except for maybe payroll, which is more compliance and government-driven. So from an HR perspective, talent management, time and labor and benefits we think there is incremental product opportunities in all of those categories.

Great. Thank you and congratulations.

Thank you.

Our next question comes from the line of Brad Reback with Stifel. Your line is now open.

Great. Thanks very much. Have you guys thought at all about segmenting the sales force? I know you answered it in Ross’ question, you talked about not having a unit goal just a dollar goal, but in an effort to maybe get more productivity, more segmentation, could that help?

Yes, so it’s a good question. I think it’s something that we have looked at historically every year and we have experimented at times at very small places with different approaches. But we have been pretty consistent in terms of having a geographically based divided sales force. We are in the planning process right now. We are in the hiring process right now for next year, so we will look at it again, but at this point in time, we haven’t made any decisions around segmentation.

Great. Thanks very much.

Our next question comes from the line of Corey Greendale with First Analysis. Your line is now open.

Hey, thanks. This is Ken Wang on for Corey. Congratulations on a strong quarter.

Thank you.

So just wondering, can you – any comments you can offer just on the BeneFLEX acquisition? Does this increase the potential annual revenue per customer figure?

Yes, sure. So I think as I said earlier, we are definitely focused on integrating the acquisition and then putting together the right operational sales and product launch plan. And so we are actively working on that. We feel good about what we are going to be able to deliver to the market. It will increase that $320 per employee per year. We haven’t finalized our pricing strategy yet. So as we do that we will certainly update you. And we think there is an opportunity to sell this both to our current clients as well as new prospects. And in addition it does offer a strong value proposition for our broker channel who today spent a lot of time referring different smaller TPAs for these mid-market clients and the value of having all of the data in the same platform with their paycheck and with their time off and with their time and labor date and benefit data, we think provides differentiation in the marketplace. So we are excited about the opportunity.

Great. Thanks. And then just switching gears, so I know you have done a lot of recruiting on the sales force side, anything you can offer just in terms of commentary on the recruiting environment?

Sure. So this is a very busy time of the year for our recruiting team and our sales team in terms of hiring. And we felt like we have got off to an earlier, slightly earlier start than prior years. And if I compare where we are today versus prior years, it’s pretty similar, feel pretty good about the number of hires that we have already got in. As you know, the earlier we can get our hiring done, which we typically like to get completed by the end of the summer and the earlier we get those people on even a month or two certainly helps from a productivity perspective, especially when you consider that January sales, the people starting in January is a big time of the year. So, it’s important for us to get the right quality people, first and foremost, but I am very happy with the progress so far.

Great. Congratulations again.

Thanks.

Our next question comes from the line of Eric Lemus with SunTrust Robinson Humphrey. Your line is now open.

Hey, guys. Nice job in the quarter. I wanted to follow-up on the last question in terms of BeneFLEX. It seems like it’s a good opportunity for the broker channel. So can we think about this as potentially being a catalyst for having the broker channel to be above 25% of sales? And then secondly, on BeneFLEX, any sort of idea on the timing of the integration?

Yes. So, I think we don’t typically give timing on new product launches before we get there. I would tell you that we are actively making progress and it’s not just product we have got to integrate the sales go-to-market as well as the operation. We got to make sure we are ready to scale because we have got a fairly large sales force and we don’t want to be in a situation where we introduced this product to the brokers and have any hiccups. So I don’t have any specific timing. We will update you next quarter in terms of what that might look like, but I would tell you we feel good about the progress that we are making. I think from a value proposition perspective, it’s incremental in the broker channel. I don’t think this necessarily dramatically changes our trajectory, but more importantly, it creates a significant ARPU and additional revenue opportunity as we bring on new customers that are either referred to us from brokers or we find obviously on our own and also gives us opportunity to sell back to the current client. So I think that’s probably the biggest part of the opportunity, but it is certainly incremental in the broker channel as well.

Okay, great. Thanks, Steve.

Our next question comes from the line of Siti Panigrahi with Wells Fargo. Your line is now open.

Hey, guys. Thanks for taking my questions. Just on the sales and marketing expense line that jumped 25% and you talked about – besides sales rep, you talked about investing in marketing mainly on the lead generation last quarter, I mean, for the second half. Could you give some color like what sort of activity happened and how much that triggered some of this like your guidance increase? And how should we expect – how should we think about the sales and marketing spending for Q4 and going forward?

Yes. So I think on the last call we highlighted the fact that we wanted to take advantage of our strong EBITDA performance in the first half of the year to give the go-ahead to our sales organization to start hiring a little earlier than they had in prior years. And I think at the time we indicated that the bigger part of the impact would likely be the fourth quarter versus the third quarter. So, I would tell you that a lot of that sales and marketing spend is really about recruiting efforts to bring on candidates as early as possible and get the full headcount as early as possible as we go into next fiscal year. I think there is always marketing initiatives that we do and those can vary quarter by quarter, but I think the bigger part of the year-over-year change is driven by sales headcount.

And also it’s good to see success from the down market that you talked about, below 50 employees, but have you seen any change in competitive landscape on your core market, maybe 120 employees or so?

Sure. Yes, I think it’s always been competitive is the first thing that I would tell you and it’s pretty rare for us to ever be the only person they are evaluating, us and the incumbent. They are typically going to evaluate 2, 3 or even maybe 4 people as they go to market. So I think it’s the usual people that we typically see as well, so no necessarily newcomers that are coming on to our radar screen. But from our perspective, we focus on our own execution. So, how do we execute within our sales force, how do we make sure that we are delivering the right service and product experience to the client and then make sure that we are – we have got the right people representing that to prospects. We feel good about our ability to win in the market and continue to grow. So, it’s always been competitive, it’s still competitive today.

Okay, thank you.

Our next question comes from the line of Abhey Lamba with Mizuho Securities. Your line is now open.

Hi, guys. Thanks. This is Parthiv on for Abhey. Congrats on the results. Just in terms of the contribution from BeneFLEX, how much were they doing on the top line and on the cost side of things? And is any of the guide up for the full year on either revenue or adjusted EBITDA coming from the acquisition?

Sure. So I would say the acquisition was relatively small from a revenue perspective. Obviously, we highlighted the fact that there was 36 employees from a cost perspective will give you some indication. I would say if you look at our full year guidance for the year and you annualize the potential impact of BeneFLEX, it’s certainly less than 1% of our revenue. So, it certainly does have an impact, but it’s relatively small.

Got it. Okay, that helps. And then just revisiting the long-term model that you guys have laid out and focusing on the gross margin lines specifically, are you guys still comfortable with that 65% to 70% target? And maybe speak to the areas where you think you can get further efficiencies that you maybe fully haven’t tapped into yet?

Yes. So I definitely think we feel like we can continue to expand overall gross margin. And I think one of the key drivers that you typically see is the broader adoption of the HCM products certainly helps us. They typically – they do require less implementation and its more configuration, but they also typically have higher margins as well. And so I think that’s certainly a driver that we would expect to be able to continue. In terms of how we view the long-term model, we are committed to focus on 20% plus growth. I think we will update what that margin profile looks like over the longer term as we enter next fiscal year and adopt 606. So, I think more to come on that, but we definitely see opportunities to continue to leverage G&A and to expand overall gross margin.

Very helpful. Thanks for taking the question.

Thank you.

Our question comes from the line of Shankar Subramanian with Bank of America/Merrill Lynch. Your line is now open.

Thank you. Congrats on the great quarter. This is a follow-up question on the BeneFLEX acquisition. Does it necessarily allow you to address larger clients in the future, meaning in fiscal ‘19, should we kind of expect the mix shift away from this lower end of the market to maybe even into the higher end?

Yes. So, I think it’s important to go back to our target market is 20 employees all the way up to 1,000 and there is times where we get clients a little smaller than that and larger than that as well. I don’t think our target market has really changed at all. One of the things that we really liked about this acquisition is their solution and where they have focused on historically is very much similar sized customers as ours. So, if you think of our average sized customer being in the 120 employee range, we think there is great overlap in terms of our target market. And I guess for that reason, at this point in time, I wouldn’t anticipate BeneFLEX driving any change to our mix.

Got it. And then in terms of the product adoption of HCM just by modules, could you talk about how the compensation and survey is trending relative to your prior quarter and then maybe give some qualitative assessment of the rest of the modules? That’s all.

Sure. So I think I have said this in the past when we introduced a new module and build a new module, we certainly expect that module to be able to get to between 10% and 20% of our customers over time. And the trajectory on those just depends on the module. But I think we feel pretty good about both compensation and surveys over a period of time getting into that range. I look back at our experience with the last two modules prior to that recruiting an expense I would say recruiting has been a great driver for us. We have seen significant demand for recruiting. Expense has been probably right behind there, not quite as much demand as recruiting, but we are both very – we are happy with both of those modules. I think early on looking at it I would say compensation scaling is slightly faster than surveys but both on a nice trajectory for us.

I am showing no further questions in queue at this time. I would like to turn the call back to management for any closing remarks.

Yes, I would like to take this opportunity to just thank everybody for their interest in Paylocity and we are going to be on the road here at investor calls. So if any of you want to have some time with us, make sure that you can get on our schedule. Thank you.

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