Paylocity Holding Corporation (PCTY) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Paylocity Holding Corporation’s First Quarter 2019 Fiscal Year Results 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 be given at that time. [Operator Instructions] As a reminder, today’s conference is being recorded. I would now like to turn the call over to Mr. Ryan Glenn, Vice President of FP&A and Investor Relations. Sir, you may begin.

Good afternoon, and welcome to Paylocity’s earnings results call for the first quarter of fiscal year 2019, which ended on September 30, 2018. I am Ryan Glenn, Vice President of FP&A 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. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the 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, Toby and I will be attending the Stifel 2018 Midwest One-on-One Growth Conference in Chicago on November 8 and Global Mizuho Investor Conference in New York on December 3. Please let me know if you would like to schedule time with us at either of these events. 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 of fiscal 2019 earnings call. We are off to a good start in fiscal 2019 with first quarter total revenue of $100.5 million, an increase of 26.1%, versus non-GAAP pro forma results for the same period last year. Recurring revenue grew by 25.8% driven by new client additions and an increase in average revenue per client as we continue to see positive momentum with our newest product offerings. Broker referrals once again represented more than 25% of new business 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. We also continue to be pleased with the consistency of our business with the first quarter of fiscal 2019 marking our seventh straight quarter with total revenue growth in the mid 20s. Adjusted EBITDA for the first quarter was $23.3 million, which exceeded the midpoint of our guidance by $2.8 million. We remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal 2019. We’ll also continue to drive operational leverage in the business as we work towards our revised adjusted EBITDA margin target of 30% to 35% of revenue. Last month, we welcomed a record number of attendees to Chicago as we kicked off our Annual Elevate Client Conference. Clients were able to choose from more than 70 breakout sessions focused on topics such as workforce and talent management, professional development and the employee experience. Additionally, our product and technology teams were onsite in our connection zone to introduce clients to the latest features and functionality of our product suite. We were also excited to begin the conference with a new product announcement with the addition of TPA solutions, which will be available in the first calendar quarter of 2019. Our technology focused offering includes a number of TPA products such as Health Savings Account and Flexible Spending Account, providing users with a single unified access point for payroll, HR and benefits administration. Our offering will include mobile and web access, allowing users to see transaction details and account balances while also having the ability to submit claims all from our employee self-service portal. In addition to the announcement of TPA solutions, we highlighted a number of new functionalities as we continue to focus on delivering innovative HCM solutions. Key product updates includes scheduling enhancements that allow for shift swapping and more robust role based scheduling, employee action forms that provides supervisors and administrators the ability to initiate employee changes through a customized approval process and proration and retro pay calculator that streamlines the process to adjust employee pay within a period. Additionally, we launched Paylocity Education and Knowledge or PEAK, a free additional self-service information resource for our clients that also contained supplemental training materials and trending topics for payroll and HCM professionals. We are very proud of Paylocity’s culture and are honored to have won a number of awards in the first quarter, including being recognized as elite winter on the list for Chicago’s best and brightest companies, a best place to Work by Built In Chicago and one of the best companies to Sell For by Selling Power Magazine. During the quarter, we also announced the addition of Ginnie Breen to our board of directors. Ginnie has experienced serving on several private and public company boards and has had a very successful career working with other technology driven and high growth companies. 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 going into our financial results, please note that the following discussion on Q1 fiscal 2019 revenue growth will be in comparison to non-GAAP pro forma results for Q1 fiscal 2018. Consistent with last quarter, in the press release we issued after the market closed today, we provided the table that illustrates as reported in non-GAAP pro forma revenue results on a quarterly basis for fiscal 2018. Total revenue for Q1 was $100.5 million, which is a 26.1% increase from the same period in the prior year. And as Steve noted, we continue to be pleased by the consistency we’re seeing in our business with Q1 marking our seventh straight quarter of total revenue growth in the mid-21s. Q1 total recurring revenue was up 25.8% from the same period last year with recurring fees up 23.9% and interest income on client funds up 116.6%, primarily as a result of balance increases, increased average interest rates and because we continue to invest a portion of client funds in high-quality available-for-sale securities during the quarter. Our adjusted recurring gross profit was 75.9%. And adjusted total gross profit 70%, for Q1 as we continue to focus on consistent revenue growth while also driving scale, while also driving scale in our business model. We continue to make significant investments in research and development. And to understand our overall investment in R&D, it’s important to combine of both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 14.7% of revenue in Q1. And on a dollar basis, our year-over-year investment in R&D increased by 27.6%. On a non-GAAP basis, sales and marketing expenses were 24.3% of revenue in Q1, as we remain focused on incremental investments in this area of our business in fiscal 2019. On a non-GAAP basis, G&A costs were 16.6% of revenue in Q1 and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA was $23.3 million or 23.1% of revenue for the quarter, which exceeded our guidance by $2.8 million at the midpoint. Briefly covering our GAAP results for the quarter, gross profit was $64.6 million; operating income was $3.8 million and net income was $9.9 million. In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $80.9 million. From a cash flow perspective, we generated $7.3 million in cash from operating activities in Q1, as compared to $8.2 million for the same period last year, which included a $1.7 million tenant improvement allowance. We remain confident that we will continue to expand free cash flow margin on an annual basis, including in fiscal 2019. Finally, I’d like to provide our financial guidance for Q2 and updated guidance for fiscal 2019. For the second quarter of fiscal 2019, total revenue is expected to be in the range of $104 million to $105 million or approximately 23% growth over nonGAAP proforma second quarter fiscal 2018 total revenue of $85 million. And adjusted EBITDA is expected to be in the range of $23.5 million to $24.5 million. For fiscal 2019, total revenue is expected to be in the range of $453 million to $455 million or approximately 22% growth over non-GAAP pro forma fiscal 2018 total revenue of $372.1 million. Adjusted EBITDA is expected to be in the range of $126.5 to $128.5 million. In conclusion, we are pleased with our Q1 results. Including the mid-20s revenue growth, we’ve generated over the last seven quarters, our ability to continuously demonstrate scale in our business and the progress we’re making towards our long-term financial targets. Operator, we’re now ready for questions. Thank you.

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

Thanks guys. Steve, maybe just to start with I guess as we head into the selling season for you guys, just curious if you can give a sense for your confidence level versus this time last year. I’m just thinking of ramped reps, the demand competitive backdrop you’re pushing to SMB and whatever other factors you might consider in that. And then, in terms of new products, as you go into the selling season, I’m just curious what you think are some of the ones that have the most opportunity to drive incremental growth versus last year? And I’ve got just a quick follow-up for Toby.

Sure. So I think going into the fiscal year, we felt good about being fully staffed and so that’s a key metric for us in making sure that we’re staffed up by the time we have our August call. So I think that’s pretty positive. I think after the first quarter being able to raise the guidance for the year is also another positive sign. And then I think it really dovetails into the second question, which is we’ve got some new products in the bag. These products continue to get better as we have them in the marketplace. So I think if you look at some of the newest products we’re recruiting a couple of years ago continues to gain momentum, compensation management to new product, a lot of people with annual cycles, that’s a popular topic in the fall season. And then we’re pretty excited about the TPA conversations. Some really good opportunities with the brokers, introducing this integrated experience with customers that will launch in the first quarter of next year, but I think it’s creating some good energy and excitement going into fall selling season.

Got it. That’s helpful. And then I guess, Toby, just a housekeeping item with the float balance or the float revenue line item. Just curious what your guidance assumes for the balance of the year in terms of the growth rate there. Thanks.

Yes, sure. So I think we’ve talked about historically that the average daily balances will generally track along with client growth. And I think the only thing that we would have incremental baked in is the rate increase that we just saw, but we don’t have any incremental rate hikes for the rest of the year baked in.

Got it. So if just we sort of model it flat to up a little bit from what you did in Q1, is that reasonable or...

That’s probably the right way to think about it.

Okay, great. Thanks guys.

Yes.

Our next question comes from Scott Berg with Needham. Your line is now open.

Hi everyone. Thanks for taking my questions. I guess I got two here. Let’s start with the broker channel. That’s been super consistent in terms of contributing about 25% of your clients over the last several quarters. You are plus now. Steve, are you actually growing those at a 25% rate recently, or are you gaining more throughput in terms of the deals that you think that they’re giving you?

Yes. So I think it’s a mix. We’re definitely growing the number of brokers. But I would tell you it’s a mix between growth in number of brokers to get to that 25% and then really getting more out of the current relationships that we have. So think about these as being individual relationships. Our reps who are operating in who are operating in the field, creating these relationships, being in the offices, working with the brokers on some of their customers, but also working with the brokers in terms of prospects in the marketplace. So I think the longer the reps are tenured in their territories, the more opportunity they have to create the relationships and we definitely see a correlation with time and market and more broker referrals. So definitely a mix between adding new and getting more of the existing relationships.

Great. That’s helpful. And then my follow-up, in your pre-scripted remarks, Steve, you had mentioned that ARPU continues to trend up. Are you seeing anything different in terms of types of modules customers are buying over the last quarter or two that might be different than maybe 12 months or 18 months ago that’s kind of driving that ARPU higher?

Yes, sure. I would say, if I were to highlight one of the categories that we operate in, it’s talent management. We’ve added a number of modules there. So onboarding’s been doing well for us, performance management, recruiting, recent adds, being surveys, compensation management. I think that category as a whole has been probably the biggest contributor to the ARPU growth. We’re still seeing though upticks in places like benefits and time and labor and HR. But if I have to highlight one of those, it would certainly be the talent management category.

Great, that’s helpful. Thanks for taking my questions.

Our next question comes from Terry Tillman with SunTrust. Your line is now open.

Hey, good afternoon, gentlemen. Can you hear me okay?

Yes.

Okay, well, yes, nice stuff on the quarter. I guess my first question just relates to, Steve, maybe you could talk about the solid new client additions in the quarter. Anything that stood out in terms of strength whether it’s under 100 employees, and I know your sweet spot generally and what it has been, or may be sub-50, or what about maybe more than 500? I’m just kind of curious if you could kind of look at some of the microsegments, and where did you see strength? Or was it actually really balanced across the board?

Yes. So I mean, you’d think of our clients average – a little more than 100 employees on average. And so we get a lot of clients below that 100. And then, obviously, we can even exceed the 1,000 target market at times as well. And so I think we see continued strength really across all segments. If I were to highlight one that maybe might be slightly stronger, it’s the same thing I said last quarter, it’s the clients that are a little bit smaller are more interested in some of these talent management products than what we’ve seen maybe two years or three years ago, and therefore, are looking for a broader solution. So you see that maybe in the under 50 space a little bit, but certainly, in that 50 to 100 space, it’s becoming a more important part of the sales process. I’d say mostly across – pretty evenly across the board with maybe a little bit more in that under 100 employees space from a strength perspective.

Okay, awesome. And maybe just a follow-up question relates to as you’re bringing more innovation to market and now the TPA suite going into next year, and all these other modules you’ve added, the talent management, et cetera, how do you balance more and more innovation, putting it in the sales bags for your sales reps and not them getting bogged down in terms of learning all these products or maybe sometimes lengthening of the sales cycles. Do you need to do anything around – related to that, would you need to start doing more like a specialist that help or overlay type dynamics or maybe – I just would love to learn more about that.

Yes, that’s a fair question. So we have a pretty significant sized solution consultants. I kind of think of that as a sales engineer role that’s often doing most of the demonstrations on behalf of the sales rep. And so really, they’ve got some resources that can really help them explain maybe a more complicated product. I think the other thing we’ve talked about in the past, our clients are really buying these in a more bundled fashion. They’re picking the modules that they want. They’re looking at a bundled price. It’s fairly simple from a one price per employee per month perspective. So it’s a little bit easier to digest from a client perspective. Leveraging the sales engineers allows us to efficiently run through a demonstration process. And that’s one of the reasons, if you look at it over the last couple of years, we’ve invested more resources in that solution consultant world, which, we think, has been very effective.

Okay, thank you.

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

Hi guys, Kevin here on for Brian. Thanks for taking my call. We heard a lot of interest at your user conference surrounding some of the newer LMS and employee experience product offerings. Can you help us frame what the early adopter customers have looked like there? And maybe how should we think about the trajectory for some of those add-on offerings?

Yes. So one of the things that we do at the Elevate Conference is we take products that are not even ready for launch yet and are in, really, development and we seek feedback from some early adopters. So we have some learning components built into our product today, and we’re adding on to that and so we’ve got some early adopters using some very initial versions of that – those learning products. And we’re really excited about the opportunity to build upon that and eventually be in a position to launch an LMS product to market. And we think that the idea of being able to create content across the entire organization can be very different and really leveraging into that employee experience and having the ability to share content across an organization. So I think the feedback from the early adopters is this is really helping them going beyond just automating some of their HR processes, but it’s really connecting employees across an organization and really allowing them to drive knowledge as well as drive the culture. And those are the types of things that we think can really drive engagement in an organization and can kind of take that conversation to the next level. It also gives us an interesting opportunity to capture a whole bunch more data into our application and then drive analytics off of this. So we’re really excited about those early adopter products and the opportunity long term to be able to drive real culture changes for our clients by leveraging our platform.

Got it. You had some enhanced Self-service features that are on display at the conference as well. And I’m curious how you think about building out those capabilities across the platform. And maybe, do you view that as a potential area for expense leverage longer term?

Yes, we’re definitely seeing increased employee utilization across our platform as a whole. And we’re looking for additional features that we can continue to drive increases to that. And so the example, I think, you’re talking about is we’re really creating a bit of a community within our product where employees are able to share initiatives, pictures. We’ve got 2,700 employees roughly across the country, different offices. And so we’ll run different campaigns, charitable giving campaigns. We’ll run fun things like for Halloween-type holidays. We’ll share the comments in the community and reactions across the organization. And that’s one example of where clients can leverage our platform to be able to create a little bit more of a community and create more content across the organization. And we think that’s going to be a really important part of our long-term strategy to continue to move from not just an HCM platform but to an overall employee engagement experience.

Very helpful, thank you.

Our next question comes from Nandan Amladi with Guggenheim Securities. Your line is now open.

Thanks for taking my question. So Steve, you talked about the TPA capability and you made an acquisition last quarter. How does this relate in the context of differentiating the product? Because you’ve talked historically about the large number of data integrations you have with other products. So how do you contrast owning this product and having it be a part of the speed relative to integrating with all these other ones?

Yes. I think our analysis on this market opportunity drove us to make that acquisition and then consequently develop a team really focused on building a much better HSA and FSA experience targeted at the employee. And so if you think about what exists in the marketplace today, it’s still fairly disaggregated. We’ve got really significant utilization of both our mobile app and our employee portal. And so we’ll have 600,000 or 700,000 unique users on a daily basis. And so if we can drive more integrated user experience where they can see their balance, they can check their balance before they walk into the pharmacy and make sure they’ve got enough money to make that payment, they can actually take a picture of something and make claims all from an application they’re used to using where they see their paycheck, request time off and punch. We think that can be a significant advantage in the marketplace. And so we’re actively building towards that such that we can launch this product in the first calendar quarter of 2019. And we’ll continue to integrate with partners if that ends up being a preference or a choice. But we also think we’ll have a pretty significant strategic advantage with our product launch.

Thank you. And a quick follow-up. Is there an opportunity for you to expand your broker channel and perhaps accelerate your growth by sharing some economics with them? Because that’s historically been a cross-referral with no economics on either side, right.

Sure. Yes, I think if you really think about what’s been successful for us from a broker perspective is these relationships that exist very much at the local level. And so a great broker relationship for us is the sales rep who’s been working with them for the last couple of years, and they might have exchanged three or four clients. These are not organizational level relationships that are really driven by incentives or small commission shares. They’re really driven by doing what we think is right for the customer, helping that broker prospect new customers and obviously, being able to handle some of their customers that might be dissatisfied with their current solution. And so we don’t think that the economics would be meaningful enough to really move the needle. Obviously, it’s something we could consider on a go-forward basis. But at this point in time, it just has not been that necessary.

Thank you.

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

Hey, thanks. This is Ken on for Corey. Congratulations on the strong quarter. Just to begin, just want to see any notable change during the quarter in the competitive posture of any of the large incumbents?

No. I would say it’s been competitive for a long time. It’s always competitive. There’s obviously a number of us in the space, and that’s why we feel it’s really important to continue to focus on differentiating our solutions and investing in R&D. I wouldn’t say – I wouldn’t call it anything different in the competitive landscape, however.

Got it, thanks. And then just the second one for me, any change in the recruiting environment for salespeople?

Well, I think, overall, if you look at the market as a whole, obviously, the labor markets are pretty tight. It’s tough to find great people. We spend a lot of time and energy focusing on finding great people, really, across all of our employees, sales being a great example, technology and operational positions as well. We’ve got a strong recruiting team that does that, and we’re constantly priming the pipe in terms of finding the right folks. We are fully staffed going into this fiscal year from a sales perspective, so we felt really good about that. I think we mentioned on the last call, we’ll – throughout this fiscal year, we’ll also start to staff some people focused at this emerging market opportunity, which won’t have any impact this year, but it’s something that we think could be meaningful in years to come. And so we’re actively doing that, and we feel good about our trajectory in terms of bringing on people for that opportunity as well.

Great, thank you.

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

Hi, guys. Thanks for taking the question and congrats on the results. So just have a question on the revenue guidance for the year. If I look at the interest income, it’s more than doubled in the first quarter but – and your overall revenue for the year was just up by the beat. And – but if I implied recurring revenue growth rate, it doesn’t seem to be accelerating from current levels. Just wanted to understand your thought process as you look into the rest of the year. Do you see any catalyst for increase in the recurring revenue growth rate based on, say, product improvements of sales, product upsells? So any color on there will be helpful.

Yes, I think I mentioned in my prepared remarks. We’ve had, overall, pretty consistent recurring revenue growth. And I think even if you kind of back out some of the interest revenue growth overall, we’ve kind have been in this kind of mid-20s kind of range for about seven quarters now. I think what we feel really good about is the consistency of that revenue growth. And obviously, from a long-term model perspective, we’re driving to 20% plus growth. So having the consistency, for us, is really important, especially if you go back a couple of years ago coming off the back of ACA. We feel good about where we sit right now.

Got it. On the customer segment split, we did a survey in September of about 100 of your customers. And about 20% of them or 25% of them came in the 1,000 plus even 2,000 plus level. I know you mentioned in the past that you’ve made some improvements in the sales, how you go to market with a higher end and you actually have been able to make more. Talk – is there anything that has changed, anything that you can make to have better growth in that higher end segment? I know you’re trying to make investment in the lower end. Help us understand if there’s any upside in that opportunity.

Yes. So we have a very small percentage of our customers that are over 1,000 employees, so the large, large majority are in their target markets. So obviously, we were able to find some of those. But we do have some. And we definitely focus on really all three segments. If you think about the large end of our marketplace, we have made some investments there, and we feel good about the momentum that we’ve got there. There’s certainly opportunity there. There’s also a ton of opportunity in majors. If you look at our overall penetration rate, we’ve got a small number of clients relative to the total clients available in the marketplace. And then emerging, at this point, is just relatively new, and I wouldn’t say having an impact to this year. So right now, we’re focused on continued enhancements in terms of our go-to-market strategy in majors and really the upper end of our market segment. And I think feeling like we can raise revenue here where we sit. And the consistency that we’re driving, that would tell you that we’ve got to have consistent results in both majors as well as the upper end of the market.

Perfect. Thank you.

[Operator Instructions] Our next question comes from the line of Mark Marcon with Robert W. Baird. Your line is now open.

Good afternoon. Let me my congrats. At Elevate, it looked like there was a lot of enthusiasm around some of the new solutions. I was just wondering if you could talk a little bit about contextualizing how much the ARPU could benefit this – during this selling season as we go into the next calendar year from additional cross sales, both into the existing logos as well as into new logos. You’ve – Steve, you mentioned recruiting and talent management more prominently. Just wondering if we could – how we should think about that?

Sure. So I think last year, we had ARPU growth of approximately 10%. And so we’re kind of in that range last year. And remember, the client size was just down slightly, so it would have even been a little bit higher than that. So I think we’ve been in the mid-teens to lower teens if you look at it over the last several years from an ARPU growth perspective. We’re just one quarter in. We’re in the midst of selling season right now. We like the early momentum. We have continued momentum around ARPU growth. So it will be difficult for us at this point to predict because, as you probably remember, we don’t necessarily provide unit incentives or specific product penetration incentives. The sales organization’s really reacting to the customer needs and trying to provide them as many products as possible at the point-of-sale. And at the same time, we do a little sale back to our client base, which obviously helps ARPU. But I would just tell you that we kind of feel good with the way our ARPU’s going and nothing that would be very inconsistent with our prior years.

Great. And then something like the integration with QuickBooks that you – there’s a really packed session for that. Do you charge extra for things like that or how should we think about those things?

Yes. So if you think about our integration marketplace and all the data points that we integrate with, they’re typically obviously solutions we don’t offer there, but they can use the data that we have. So 401(k) is a good example, obviously. And so you mentioned another great example which is the GL software. And so ultimately, if you’re running payroll, you’ve got to get your journals entries done. And so we integrate with a wide variety of GL packages. And one of the things that we highlighted at the conference was a much more improved level of integration with QuickBooks, which is obviously one of the dominant general ledger packages, particularly in the smaller end of the marketplace. And so customers reacted really well with those integration. We’ll continue to add new integrations to the integration marketplace, and we’ll also look to be able to use APIs and web services to be able to improve the existing integrations as our partners continue to enhance those capabilities.

Great. And we – obviously, we saw the guidance, but just wondering as you look at the macro economy and feedback from potential clients, how would you characterize just the overall environment right now just in terms of ability of clients to pull the trigger and make a change?

Yes. I mean, I think clients probably, in our conversations, are echoing the same sentiments I gave you, which is it’s harder to find talent, and obviously, you need to work harder to be able to retain the talent that you’ve got. Certainly, clients – some clients we hear struggle with skill gaps in terms of what they’re looking for in the marketplace. We think that really tease up a great conversation with HR professionals on the broader suite. So that’s one of the reasons, I think, we’re seeing a little bit more traction in talent management is people are definitely more focused on attracting or retaining the tenant that they have, and they’re feeling the pressure of an economy that’s growing a little bit better, all which we think is right in line with our product development strategy.

Just as a follow-up to that. Can you just give us a sense for how much more of the ARPU would be with your average client if they take on talent management versus if they didn’t, and kind of what the penetration rate is there?

Yes. So I don’t know if we’d break it out exactly by module, but if you’re at $320 per employee per year, I think you can think of talent management as being a pretty significant contributor to that $320. It’s growing over time. You can probably trace back through the modules that we’ve added and kind of get to kind of a reasonable range for that. We’re still getting growth in the other ones, so I don’t want to necessarily be solely focused on that. Benefit administration is an area that is certainly of interest to us, automating the time and labor, and scheduling capabilities is also growing nicely for us. And – but we’ve added a most modules in talent management, and that’s probably the biggest driver behind it.

Great. And then lastly, just looking at the guidance in terms of the second half of the fiscal year. Historically, you’ve been fairly conservative. You’ve mentioned over several times on this conference call that you’ve been consistent in terms of the growth rate. When we just look at the implied de-sell in the second half, that’s typically just conservatism, right?

Well, I think the way our business cycle works is first quarter of the year, it’s certainly important for us to get off to a good start and we like to be in a position where we can raise guidance. But really, the big cycle for us is going to be selling season then January starts. And so both retention of existing clients through January as well as the starts for January is the extremely important to our business. And I think a little bit of conservatism going into that season is what you typically see from us year-after-year because it’s just so important for the fiscal year that we’re in.

Got it. Thank you.

Our next question comes from Jeff Van Rhee with Craig-Hallum. Your line is now open.

Great. Thanks for taking the question. Nice quarter. A couple, just numbers and then one other if I could. Just a high-level first. Obviously, nice performance, top and bottom line, if you look at the EBITDA outperformance this quarter. And then I look at the annual guide, your raised the revenue but you’ve reiterated the EBITDA after the outperformance this quarter. So the comfort to take the revenue higher and seemingly then take some of that and put it back in the business. Just help me understand where that incremental investment is?

Yes. So I think if you go back to what we said last quarter, we looked at this year as an opportunity to make some incremental investments, both in R&D and sales and marketing, which, obviously, are the big drivers of our business. And so early in the year, when you’re talking $2 million or $3 million be on the size that we’re talking, it’s not a huge number. It doesn’t necessarily mean that there’s some brand new initiative associated with it, but it does allow us to potentially use some of that beat to be able to advance some of the initiatives that we currently have in-flight, and those would definitely fall in those two categories, sales and marketing in R&D.

Got it. Okay. And then just as you look at the new customer capture, just – what has changed in terms of what you’re displacing? How many of those customers have what you would call a modern cloud product that you’re taking out versus others? I’m just curious what you’re displacing and how it’s changed.

Sure, yes. I think interestingly enough, it probably lines up to what’s available in the marketplace. I don’t think we have dramatically more success based off of one prior provider than the other. The biggest players is where we get most of our customers from. In-house is probably a smaller part of the market today. We still get a reasonable number from them. But I really wouldn’t call out anything different over the last several years. It’s been fairly consistent. And I think that consistency is really just driven from the fact that we’re winning based off the value that we’re offering the customer, the strength of our product portfolio, the execution by our sales rep. It’s less about the competitor that’s in front of us.

Got it. Thank you

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

It was partially answered, I think, my question, which was really on margins. But I’m just curious, Steve, is the incremental investments you’ve talked about, some opportunity to invest in that lower end opportunity, is that part of where some of the upside in revenue is being invested? And are there other areas that you’d highlight that are also taking investment? And then maybe third, if we were to see more upside to revenue, I mean, how do we calibrate or think about calibrating how much of that you would reinvest?

Yes, I think I called out kind of R&D and sales and marketing. It’s probably, if you weighted the two, it’s probably sales and marketing oriented than it is R&D. And I think if you dive into the sales and marketing category, there’s certainly an element of us sprinkling it across some existing initiatives that we have going on in trying to accelerate those. But I think your call out on investing in the emerging market is one that is absolutely in flight. We’re early in that cycle. So once again, no material impact to this year, but certainly having a little bit of strength after the first quarter, potentially gives us the opportunity to accelerate that initiative as well as many of the other ones that we’ve got going on.

And then if you were to show more rev upside, would you balance incremental investment with that? Or – I don’t hear you stating that you would divest at all. So I guess I’m just trying to understand the thought.

Yes, I mean, once again, it’s first quarter of the fiscal year. I think I go back to the point I made earlier which is we are in the midst of selling season as we speak right now. As we get through January, it’s a very important part of our – important part of our year, both in new revenue as well as revenue retention. And so as we get through kind of the third quarter of the year, it’s just so much more visible. They’re not really huge dollars that we’re talking about. So I think if you look at our history, our history has been we’ve taken some of those dollars to the bottom line and look for opportunities to invest. And I don’t think we’ve changed that philosophy.

Okay. And maybe just one last one, the emerging market for you, downmarket, that’s a slightly different competitor set than maybe the traditional kind of 100 plus employee area. I’m just curious, when you think about competition down there versus competition in that 100 plus, do you have a – do you think of it differently in the context of how sophisticated it is or how, I don’t know, advanced it is relative to your products? Is there a different way of kind of carving out that competitive dynamic downmarket?

Sure. I think, down-market, there are some differences as you indicate. I think the primary competitors are the same, large traditional providers that we see upmarket. It might be a different product downmarket the they’re driving, but it is the usual players that we see the most. You obviously have some new players in that space. Many of those can be regionally based, so there’s a whole set of regional players that are going to be new. And you’re going to obviously see certain players that are in the upmarket just won’t play there at all. I think most of it’s similar, very similar in terms of the people we’re used to seeing. It’s oftentimes though with a different product, and we think that’s one of the unique things that we can do is take the exact same platform, skinny it down a little bit in terms of what we think our customers use and then be able to take a customer from 20 employees up to 1,000 employees and be able to turn on capabilities and functionality as organizations grow and scale.

Thanks so much.

Thank you.

I’m showing no further questions in queue at this time. I’d like to turn the call back to Mr. Beauchamp for closing remarks.

I just like to take this opportunity to thank all of you for your interest in Paylocity and thank all of our employees who are listening in the call for their efforts this last quarter. Thanks, everybody, and have a great night.

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.