Paylocity Holding's (PCTY) CEO Steve Beauchamp on F3Q 2014 Results - Earnings Call Transcript

May.15.14 | About: Paylocity Holding (PCTY)

Paylocity Holding Corp. (NASDAQ:PCTY)

F3Q 2014 Earnings Conference Call

May 08, 2014 05:00 PM ET

Executives

Peter McGrail - CFO

Steve Beauchamp - President and CEO

Analysts

Justin Furby - William Blair & Company

Terry Tillman - Raymond James

Nandan Amladi - Deutsche Bank

Pat Walravens - JMP Group

Cash Begdan - Merrill Lynch

Michael Turn - Needham & Company

Operator

Good day ladies and gentlemen, and welcome to the Paylocity’s Earnings Results Call for the Third Quarter of Fiscal 2014 Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instruction will follow at that time. (Operator Instructions) As a reminder, this call has been recorded.

I would now like to introduce your host for today’s conference Peter McGrail, CFO. Go ahead.

Peter McGrail

Good afternoon, welcome to Paylocity’s earnings call for the third quarter of 2014, which ended on March 31, 2014. I am Peter McGrail, CFO, and joining me on the call today is Steve Beauchamp, Chief Executive Officer of Paylocity. Today we will be discussing results announced in our press release issued after the market close. 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 in this discussion 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 with 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 prospectus and other Security and Exchange Commission filings 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. There is reconciliation schedule detailing these results currently available in our press release, which is located on our website at www.paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission.

With that, let me turn the call over to Steve.

Steve Beauchamp

Thank you, Peter. I’d like to thank everyone for taking the time to join us for our first earnings call as a public company. We are here to discuss the strong results from our fiscal third quarter which ended March 31st. Peter will review our financial results in detail, but let me share few highlights upfront.

Our third fiscal quarter is always our largest from a revenue and gross profit perspective due to the annual fees we charge for preparation of W-2s and another required tax filings that we process on behalf of our clients. Our third quarter is also very important quarter for on-boarding new business revenue and I’m pleased to report that demand for our cloud-based unified payroll and human capital management solutions was the primary driver of our strong revenue performance.

With $33.8 million in total revenue, we posed 41% growth versus the same quarter last year. Recurring revenue, which represents 92% of our revenue grew 40% year-over-year. Our revenue retention rate continues to be in excess of 92% which is best in class for a Company targeting mid-sized firms. Our third fiscal quarter is the largest quarter for our sales team with many clients preferring to switch solutions at the start of our calendar year. Our sales organization delivered robust revenue growth from new clients.

While we continue to invest aggressively in product development and sales and marketing, we also generated a small net profit for the quarter. Lastly, our balance sheet was strengthened by our IPO which raised net proceeds of over $82 million. Our total cash at the end of the third quarter was approximately $89 million. The increase in our resources provides us with the ability to execute against our strategic growth initiatives and fully capitalize on our market opportunity.

Since this is our first quarter as a company, I want to briefly review the market opportunity, our differentiated SaaS platform and our go-to-market strategy. We deliver cloud-based payroll and human capital management software tailored specifically to the needs of medium sized companies. We define medium-sized companies as those with 20 to 1000 employees. We believe we are in the early stages of a major market share shift from traditional payroll service providers to cloud-based SaaS solutions which leverage the payroll system to enable more comprehensive human capital management capabilities.

There were 565,000 firms that fit the definition of mid-size in the U.S. in 2010 and we have less than 2% penetration into that target market. We are a leading vendor of next generation SaaS based human capital management solutions targeted at mid market and we believe we are best positioned to capture this opportunity. The 40% plus growth we delivered in the third quarter was fueled by this shift in spending as well as the strength of our platform and companywide execution.

We generally replace traditional payroll systems from the large payroll outsourcers. Over the last five years, we’ve experienced shift in our sales process where five years ago we had to push the idea of moving to a SaaS based system to now SaaS being the first requirement. From a long-term perspective, we believe that the strong majority of mid-sized companies will move to SaaS based solutions and in particular a unified suite of payroll and human capital management solutions.

We built our multitenant software platform called Web Pay so companies could both automate their payroll functions and extend into other human capital management applications such as time and labor tracking, human resources, benefits and talent management from a single unified solution. Our payroll and HCM applications use a unified database and provide robust on-demand reporting and analytics. Our platform also provides intuitive self-service functionality for employees and managers.

Starting with a must have process like payroll allows users to more eagerly expand into other HCM categories, all from a single SaaS based software platform. We have designed our implementation in client service organization to meet the needs of medium sized organizations who lack the IT and HR resources of larger enterprises. Since our clients often have limited resources, they require easy to use product in a service model that allows them to quickly deploy our payroll and HCM solutions.

We market and sell our products primarily through our direct sales force. We have a high velocity sales model with a 60 day sales cycle for a typical client followed by a three to six week implementation process to get that new client started. With high volume sales and an implementation model tailored to the need of medium-sized businesses, managing our revenue growth risk is different than traditional enterprise software companies. Our revenues are fairly linear over the course of the quarter and we are not waiting to sign a few large deals at the end of the quarter to achieve our sales objective. We are very metrics driven and assess the productivity of our sales reps frequently. We know how businesses convert over time. Tracking this information provides us with a comfort as to how our sales funnel is operating.

We have also developed a unique referral network of 401k advisors, insurance brokers, third party administrators and HR consultants which provide our sales force highly qualified leads. A key reason for our success in this channel is our ability to automate data integration capabilities to clients, connecting client’s payroll information to product providers in the 401k and insurance industries. They reduce complexity and reduce the risk of error associated with manual data transfers saving time for our clients and their brokers. Greater than 25% of our new revenue generated by our sales organization comes from leads provided by this referral channel.

We have also leveraged two resellers to address specific territories and as we noted in our S1, we have the right to acquire them. The IPO triggered the right to acquire one reseller this fiscal year and in fact we are in the process of doing that now and expect the acquisition to close by the end of May. While acquiring resellers doesn’t change our revenue outlook, it should improve our gross margins.

A key aspect of Paylocity differentiation in the market is the continuous product innovation we bring to our customers. During the quarter we brought new functionality to the market in the form of Paylocity impressions in mobile, mobile punching with GPS and healthcare reform analytics. With Paylocity impressions in mobile, we have extended our social collaboration capability for peer to peer recognition from the desktop into mobile device. Not only do employees have the ability to recognize one another with a customized badge but managers can then approve the recognition all through a mobile device. Peer to peer real time recognition is a critical social component for any organization and impressions in mobile now delivers it in a more powerful and accessible way as a result of the series of enhancements.

During the quarter we also released Web Time punch with GPS enabled in our mobile application. The addition of this capability allows current employees to use our mobile based iPhone or Android application to punch in and out recording employee hours work remotely without sacrificing any of the flexibility of the desktop version. Additionally the phone’s GPS system is leverage for providing a visual representation via Google Maps to the managers of where those punches are taking place. This supports greater control and oversight along with added flexibility and ease of use.

Finally in Q3 we saw continued deployment and use of healthcare reform dashboards and analytic tools. Clients, along with our benefit broker partners, are leveraging our unique tools for planning purposes and do a share compliance with the upcoming legislation taking effect in January 1, 2015. Clients and their brokers’ access these analytic dashboards to track and overwrite hours worked for employees and then to analyze eligibility and affordability based on rules unique to their company. The analytics module has been very well received by our referring brokers with more than 500 brokers attending our series of online seminars introducing this new functionality and providing legislative updates.

Continuing to enhance and expand our product portfolio is a core focus for Paylocity and we have an exciting year of innovation on tap for 2014. As important area of focus will be further expanding the features and functions of our human capital management solutions. We will be highlighting some of this new functionality at the Nation Society for Human Resource Management Show in late June.

In summary, we are very pleased with the third quarter results. Before I pass the call over to Peter to review the financial details, I would like to thank our customers, employees and partners for their commitment to Paylocity. I could not be prouder of the collective work across each of our Paylocity teams and appreciate the ongoing support we receive from our clients and partners as we deliver innovative solutions to this underserved market.

With that, let me turn it over to Peter.

Peter McGrail

Thanks Steve. Before reviewing our financial results in detail, it’s worth covering the key aspects of our financial model as this is our first call as a publicly traded company. Our recurring revenues have historically represented hundred 94% or more of our overall revenues and is comprised of two components. First, we have recurring fees attributable to our cloud-based payroll and HCM software solutions, which make up greater than 92% of our overall revenues annually. These recurring fees generally include per client base fees, in addition to our fee-based on the number of clients employed and the number of products a client uses.

In our third fiscal quarter, we also charge fees attributable to our preparation of the W-2 documents in annual required tax filings on behalf of our client. Second, we also earn interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance, we earn interest on these funds through financial institutions with which we have automated clearinghouse arrangements. Given the current interest rate environment, we do not derive a material amount of recurring revenue from this source, 1% to 2% of overall revenue. But we would obviously benefit from an increase in interest rates.

Our non-recurring revenues are comprised of implementation services and other, and primarily consist of implementation fees charged to new clients for professional services provided to implement and configure our payroll and HCM solutions. These fees typically represent 5% to 6% of overall revenues on an annual basis. Implementations of our payroll solutions typically require only 3 to 6 weeks, at which point the new client’s first payroll is run using our solution. At this point our implementation services are completed, so we invoice and recognize the related revenue. We have no meaningful amount of deferred revenue to speak of.

Our agreements with clients do not have a specified term and are general and cancellable by the client on 60 days unless noted. Even without fixed term agreements, our annual revenue retention rate has been consistently greater than 92% for several years, which as Steve noted, is best in class for a company targeting firms with 20 to 1000 employees. This combination of high recurring revenue percentages, and high retention rates provide significant visibility into our future operating results. As Steve noted, given the size of the addressable market and our low penetration levels, we are almost entirely focused on the land part of our strategy, generating revenue from new clients. Therefore to give you the best sense of our momentum in this regard, we intend to provide a quarterly look at recurring fees from new versus existing clients. We also plan in updating you quarterly with regards to our revenue retention performance.

Like our revenues, we separate our cost of revenues into two different categories; recurrent revenue and implementation services and other. These two numbers are combined to form or overall costs and then to produce our overall gross profit margins. We refine our gross margins further by providing adjusted numbers. We adjust for two items. First, we exclude stock-based compensation. And second, we exclude amortization expense associated with capitalized research and development costs. We believe that the adjusted numbers provide the best and most reliable comparison to other SaaS companies.

We view our adjusted recurring revenue margins as the best parameter for our overall long-term margin opportunity as we generate these margins on the vast majority of our revenues. We view the negative margins on our implementation services as a great short-term investment which then becomes a long-term, high-margin annuity. In regards to implementations, we charge what we believe are market rates and will continue this practice as we continue to gain market share. Over the long term, we believe we can achieve 65% to 70% overall gross margins. We have opportunities to increase our recurring revenue margins by purchasing our two resellers and as we continue to scale, we expect to leverage our cost structure.

Looking at the operating expense side of our business, we have historically managed the Company to breakeven. As you may remember from our S-1, throughout our history, we've only raised $6 million of primary funding which occurs in May 2008. Our goal has always been to take advantage of this very large market opportunity and our recently completed IPO considerably advances that cause. More specifically, the IPO allows us to increase our investments in research and development to maintain and extend our technological leadership. It also allows us to invest in sales and marketing activities that have the potential for longer term impacts, including those in our unique broker referral channel.

Lastly, as I noted a moment ago, like others in our industry we do collect funds from our clients in advance of making payments to employees and taxing authorities. Or cash flows from investing and financing activities are influenced by the timing and amount of funds held for clients which vary significantly from quarter-to-quarter. Funds held for clients are restricted solely for the repayment of client fund obligations.

With that overview, let me review our third quarter 2014 results starting with income statement. Total revenue for the quarter was $33.8 million, which represents a robust 41% increase from the same period in the prior year. As Steve noted, revenue in the third fiscal quarter is always our largest due to our annual recurring billings attributable to the preparation of W-2s and other annual tax filings. January has also historically been the month where we generate the most new client starts during the year and this year was no exception. All that being said, our sales organization had a very strong quarter with regard to generating revenue from new customers. Our total recurring revenue of $31.2 million was up 40% year-over-year and represented 92% of our total revenue in the quarter.

Implementation services and other revenue was $2.6 million which was 47% from the year ago level. In terms of supplemental revenue metrics, recurring fees from new clients represented 41% of total recurring fees on a fiscal year-to-date basis which was the same as the last fiscal year and indicates our continued focus on the land part of our strategy. In addition, revenue retention always calculated on a trailing 12 months basis was greater than 92% for the period which is directly in line with our historical performance and is, we believe, best in class for our segment.

Moving down to P&L, I’ll be talking about gross profit on an adjusted basis which an addition to excluding stoked-based compensation also excludes amortization of capitalized software. A reconciliation of GAAP to non-GAAP is provided in the press release we issued after the close today. Adjusted gross profit in the third quarter was $19.6 million representing a gross margin of 58% as compared to $14 million of 58% in the third quarter of 2013. Further our adjusted gross profit on recurring revenues was $21.7 million or 69% in the third quarter up from $50.1 million or 68% in the year prior.

Now turning to operating expenses, I will also discuss them on a non-GAAP basis excluding stock-based compensation. We have invested and intend to continue to invest in growing our research and development activities to improve and expand our product offerings. It is essential that we not only maintain but expand what we believe is our technological leadership in our segment. In order to under our overall investment in research and development, it is important to combine both what we expense and we capitalize. On a combined basis, research and development costs were $3.4 million in the third quarter a 45% increase from the prior year. Further for the nine months ended March 31, 2014, we’ve increased our research and development expenses to $9.6 million a 59% increase over the prior year.

Sales and marketing expense increased to $8.5 million in the third quarter a 44% increase in the prior year. As we aggressively pursue the land phase of our strategy, we continue to grow our sales force and expand our marketing activities. General and administrative costs were $4.7 million as compared to $2.8 million in the prior year. The increase is largely the result of public company cost. Our adjusted EBITDA, which is adjusted only stock-based compensation was $5.2 million for the quarter versus $4.2 million for the year prior. Our increase in sales was partially offset by increases in operating expenses. Since we went public so late in the third quarter, we would expect that our operating expenses as a percentage of sales will continue to increase in the near-term as we invest in research and development, expand our sales force and marketing activity and operate as a public company.

Again, our adjusted EBITDA results in the third quarter are positively affected by our recurring annual billings that occurred during this quarter. Overtime, we believe that our investments and strategies will enable us to create a substantial long-term shareholder value. On a pro forma basis, non-GAAP net income per share was $0.04 based on $44.9 million diluted weighted shares outstanding. This compares to per share income of $0.05 based on $44.4 million diluted weighted shares outstanding at the same period of last year.

Briefly covering our GAAP results, gross profit was $18.8 million, operating income was $2.1 million and net income was $1.2 million. In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $89 million, driven largely by net IPO proceeds of $82 million. From a cash flow perspective, we generated $8.1 million in cash from operating activities in the nine months ended March 31, 2014, and spent $7.9 million on property, plant and equipment and capitalized software. We also paid down our remaining outstanding indebtedness of $1.6 million.

Finally, I’d like to provide our financial guidance for the fourth quarter and full year of fiscal 2014 -- fourth quarter fiscal 2014. Total revenue for the company’s fourth quarter of fiscal year 2014 was projected to be in the range of $26 million to $27 million an increase of approximately 28% to 33% year-over-year. Adjusted EBITDA is expected to be a loss in the range of negative $1.3 million to negative $2.3 million. Non-GAAP net loss is expected to be in the range of negative $1.8 million to negative $2.8 million or negative $0.04 to negative $0.06 per share based on 49.6 million basic weighted average common shares outstanding. This guidance assumes an income tax benefit of approximately 1.2 million.

Fiscal year 2014 guidance; revenue for the Company’s full year 2014 is projected to be in the range of $106 million to $107 million, an increase of approximately 37% to 38% year-over-year. Adjusted EBITDA is expected to be in the range of $3.4 million to $4.4 million. On a pro forma basis to reflect the conversion of all outstanding preferred shares as of July 1, 2013, non-GAAP net loss is expected to be in a range of negative $1.2 million to negative $2.2 million, or negative $0.03 to negative $0.05 per share based on 45.4 million basic weighted average common shares outstanding. This guidance assumes an income tax benefit of approximately $0.8 million and assumes no valuation allowance in the fourth quarter. We provide tax benefit information as we assess the need for our valuation allowance at the end of every reported period. We have not recorded a valuation allowance in the past but this does not mean we will not require one in the future.

Lastly, I did want to point out a quarter three subsequent event. Our principle stockholder and founder, Steve Sarowitz is contributing $1.1 million to the company for the express purpose of paying a cash bonus to long term employees in recognition of their past service. The company intends to record a capital contribution to additional paid in capital for the amount received from Mr. Sarowitz and compensation expense for the amount paid to employees in the three month period ended June 30, 2014 accordingly. It is a tremendous gesture by our founder who remains a great component and contributor to our success.

In summary, we are pleased with our operational performance during the third fiscal quarter of 2014. We now ready to begin the Q&A session.

Question-And-Answer Session

Operator

(Operator Instructions) And our first question comes from Justin Furby from William Blair & Company. Please go ahead.

Justin Furby - William Blair & Company

Steve, I guess to start off big picture, where do you think (indiscernible) five years from now, are they still growing and then obviously they’re not going away but which of these two do you think is better positioned to push back threats like you guys like OTN [ph] and some of the others out there?

Steven Beauchamp

Sure, it’s a good question. Obviously we get a majority of our business from those large payroll providers ADP and Paychex. I think you have to go back to what’s happening in the marketplace. There is definitely a shift in SaaS. I think as I said in my opening remarks, we used to really have to introduce the SaaS concept back five years ago. It’s becoming clear that customers are not only looking for SaaS but they’re really looking for a unified experience. We would anticipate that ADP or Paychex will continue to invest in their products and solutions and they certainly do understand this trend. I think also you can look at them historically and look at relatively low unit growth and really pushing additional products back to the customers.

So I think that’s the main reason why we feel we need to continue to invest in our technology and continue to extend our technological leadership. If we do that that is what we think is the formula for success and that is what we’re focused on. And we anticipate them trying to react to that but we feel confident that if we do our part, we would be successful for the long term.

Justin Furby - William Blair & Company

Okay. And obviously there has been quite a bit of discussion around OTN and potential partnerships with Paychex. I guess can you offer a couple of scenarios A. where they get a yield on with Paychex and then and the other scenario where they build out their own sales team around that? I guess I'm just curious how you think that would play out each of those two scenarios over the next couple of years as it relates to you guys.

Steven Beauchamp

Yeah, so scenario A I guess is a speculation in terms of potential partnership between Ultimate Software and Paychex. We think that our winning formula combines the technology that we have in the marketplace, the go to market strategy that we have with our sales force in a unique referral channel that we’ve built combined with really an implementation and service delivery process that is specifically tailored to meet the needs of medium size organizations.

So from our perspective Ultimate Software is a great company and they’ve had great success, and obviously there is very little overlap in our current market focus with them today. Paychex, there would certainly be much more overlap but we believe all three of those things would have to replicated to really gain significant market share and we think we’ve got that advantage. And frankly the same holds true for scenario B. So if Ultimate were to expand in that space, they’ve got a very robust platform, clearly a SaaS platform and they’ve had great success and we have great respect for them as a company. We think we just have a different model in terms of go to market strategy, our delivery model in terms of service and implementation, and lastly our product is really tailored to that medium size organization. So we think we’re in a position to be successful if they chose scenario A and B and it’s a very large market opportunity. So we can frankly both have a level of success.

Justin Furby - William Blair & Company

Okay. And then I think you are entering the quarter you start to staff up for the next fiscal year on the sales side. Can you give us a feel for sort of how you're thinking about rep addition? Similar to growth rates of last year or what’s your approach as you move into fiscal ‘15?

Steven Beauchamp

Yes, as you heard Peter say in the opening remarks we’re definitely squarely focused on the land part of our strategy and we think we have a big opportunity in front of us and our revenue growth is our primary focus. You are correct. We do start staffing in the last quarter towards our sales target for the prior years and we plan on providing you the number of quota caring reps annually. But obviously just giving you an update in terms of tracking towards that goal, I would tell you that we are in a good position towards that target and I look at it from a year-over-year basis and we’re roughly where we were last year and the year prior in terms of the number of people that we want relative to our goal by the end of the fiscal year.

Operator

Thank you. And our next question comes from Terry Tillman from Raymond James. Please go ahead.

Terry Tillman - Raymond James

I guess my first question, Steve, just relates to this broker referral network. In terms of the IPO proceeds and just investing for growth, how much of the investments are you allocating towards just further building out that referral network as opposed to just adding sales reps and just where are you in perspective of how many potential referral partners you could have versus where you are today?

Steven Beauchamp

Sure, it’s a great question. So I think the key areas of investment from the IPO from our perspective is one in a technology and R&D and Peter gave you some of the numbers in terms of the investments there. But the second area is really sales and marketing overall and part of that is definitely the broker channel. I would tell you that we have done very little marketing historically. Spend on marketing can take longer time to get the return on that but we see great opportunities to increase our levels of marketing towards that broker channel and we’re doing several things in that regard as we speak. So that certainly is a contributor of the year over year increase in terms of sales and marketing.

I think the second part of your question is how many brokers do we deal with today and how big could that be. We get more than 25% of our business through the broker channel today and even though we’ve grown our sales force aggressively, we continue to exceed that 25% threshold this year. We deal with 100s of brokers across the country and there is no reason why that can’t be 1,000s over time.

Terry Tillman - Raymond James

Okay, and new relations [indiscernible]…

Steven Beauchamp

Sorry Terry [indiscernible]...

Terry Tillman - Raymond James

Okay, that nice, first the new solutions, the benefit analytic solution to help with ACA compliance. So at some point there might be some other additional functionalities, whether it’s on-boarding or some of the other capabilities. But maybe specifically a benefit, what kind of tap on the increase or what could you see from that product and should we think about that as being added in this year or is it just like 1.0 situation where it’s going to take some time to get a good ramp in adoption?

Steven Beauchamp

We’ve actually gotten great reception in the marketplace from both our customers and brokers. I would certainly call it as the 1.0 release for us in that category. And we don’t view this as a revenue list per se, we view this as an opportunity to continue to expand the channel. So it’s not something that we’re charging our customers for. We give them the analytics tool included in their package with us. And then brokers also have access to it.

And so from our perspective the investment in the analytics tool really allows us to continue to grow that broker channel. So I wouldn’t look at it from a revenue lift perspective but more from a broker penetration over time.

Terry Tillman - Raymond James

Okay. And just my final one just relates to I think historically you have had about 100 plus employees per average customer. Anything different in terms of average size of new business being won in the quarter. Thank you.

Steven Beauchamp

Yes, we are very much focused on the medium size organization 22,000 are roughly the average side varied about that 100 mark. It’s moved around a little bit over time but not much frankly. It’s very consistent. We did not see anything different in the quarter that would move the needle on average size customers outside of that zone.

Operator

Thank you. And our next question comes from Nandan Amladi from Deutsche Bank. Please go ahead.

Nandan Amladi - Deutsche Bank

So Steve first question is how has going public in this past quarter changed your profile in the market both from a competitive perspective, how customers perceive you, and looking out to next year, how sales people perceive you?

Steven Beauchamp

Thanks Nandan, it’s a good question. I would say from a customer perspective, one of the things that we always thought in the marketplace is we didn’t have a whole lot of brand awareness and so when we got into the sales process we would certainly hear the objection who is Paylocity, I’m not familiar with your story. Some of our large public providers would try to spread fear and uncertainty potentially about us. That has become dramatically easier to handle, that objection. So that has been very helpful from a customer perspective in the sales process.

And then from I think -- the second part of it is from an employee perspective. I think you mentioned sales people generally speaking. But certainly one of the key reasons to go public was having the ability to provide the right level of incentives and frankly the right level of investments overall into the company, and so I think you’ll see as continue to take advantage of that by investing further in sales and marketing and R&D then we have historically.

Nandan Amladi - Deutsche Bank

Thanks and a follow up again, this sort of partly was addressed earlier but little different slant on the question. As you look at sales expansion next year you also have the two reseller arrangements that you disclosed in the S1. So how do you balance that in relation to just your normal cadence of sales capacity expansion for next year?

Steven Beauchamp

Yes, so our two reseller relationships are assigned to very specific geographies and that I disclosed in kind of the opening remarks we’re in the process of acquiring one of those resellers now. We expect that to close by the end of May and so we will obviously start stacking up in most territories with our own sales head count, but we’ve already incorporated that into our total headcount goals for the year so we’re certainly actively looking at that. We need to complete that acquisition to really start that transition but our plan certainly will be to take that territory over and treat it just like any other major market across the country. The second reseller we don’t have the opportunity to acquire till first time next fiscal year. So that’s something that really isn’t -- isn’t something that we’re really concerned with at the moment.

Operator

Thank you and our next question comes from Pat Walravens from JMP Group.

Pat Walravens - JMP Group

Could you start by sharing with us just sort of what your philosophy is in terms of the rate at which you want to grow this business? You could grow it faster if you wanted to right? If you could just share that, I think that’d be really helpful.

Steven Beauchamp

Sure, Pat you know I think our philosophy -- I think if you look at our history it’s been, prior two fiscal years was 40% roughly on a growth rate this year through the first three quarters, similar growth rate as we just talked about. However I would tell you that most important to us is the quality delivery of implementation services, of ongoing services and then clearly of our products that we’re delivering to our customers. The implementation process is one that has to go right. Payroll has to be accurate every single time. So we would tell you that quality is really the governor on growth with less than 2% penetration into the total market opportunity. As you indicate we could invest more and try to grow faster but we’re not willing to do that if that is to compromise quality and we think we’ve been able to balance that at our historical growth rates in terms of quality. So that’s really how we think about that is number one, at what level of jobs can we deliver the right quality to our customers.

Pat Walravens - JMP Group

Okay and just because it is your first earnings call, I thought it would be helpful if you’d just comment briefly on who do you compete against the most frequently and why do you win.

Steven Beauchamp

Okay, sure, more than 50% of our new business comes from the traditional payroll outsourcers. So obviously the ADP and Paychex would be the two most common providers in that space. The number one reason that we win is really the SaaS technology that we have organically built and that is designed for the needs of the medium sized organization and it really starts with the fact that everybody has to have payroll. And we’ve taken that concept and expanded that into other modules, time and labor, talent management, human resources and benefits and it’s so much easier to get it from a unified platform than to buy these things individually or to use systems that have been acquired and stitched together. And so the product is really the number one reason that we win and then we back that up with great service which drives our 92% plus retention.

Pat Walravens - JMP Group

And then last one from me, when you acquired a reseller and then in the future if you acquire another one, will there be any impact on your guidance from that.

Peter McGrail

This is Peter McGrail. Yes so, the S1 in our quarterly report will show how much revenue -- has shown how much revenue we got from these resellers and how much we pay them. So as that comes -- so you’ll get from there what our majority of that we’ll get as gross margin lift as we move forward. So as we pull them in, we will build that gross margin lift into our guidance.

Steven Beauchamp

So, Pat we obviously are in the process of acquiring this reseller in the current quarter. It will impact in the current quarter. We’ve obviously included that in the guidance, when we give full year guidance next year we will have completed the one reseller. We will absolutely include that in the guidance. If there is some timing delta differences on the second reseller, we obviously would anticipate including what we know at that time.

Peter McGrail

And as that happens we will include it in our guidance.

Steven Beauchamp

Right, going forward.

Operator

Thank you. And our next question comes from Cash Begdan from Merrill Lynch. Please go ahead.

Cash Begdan - Merrill Lynch

Steve can you talk to us a little bit about the average revenue if not in specificity directionally how is the average revenue per client trending, particular average contract size for new clients trending and where are you seeing the increased incremental uptake of some of the noncore new modules in your business. Thank you.

Steven Beauchamp

All right thanks Cash, so first and foremost it’s probably important to understand how we manage our sales team and how we incent our sales team. We really incent our sales team in terms of providing new revenue to us and that’s why we also provide you with that new revenue metric versus the existing customers and so we’re as focused in terms of whether that’s coming from client growth or whether those customers to us are taking on more products. And so what you’ll see is on an annual basis, we will give you those counts and you’ll then obviously be able to calculate that average revenue per customer as well as the client growth. So it’s the new revenue that’s number one, our focus. I think just to give you some level of guidance, I don’t -- we have not shifted from the land to an expand strategy. Most of our revenue is being driven by new customers being added to the platform, and we continue to see those new customers uptake more products in all those categories. So HR, time and labor as well as benefits, and talent management still being a little bit new to us, we are seeing more uptick, but it’s just a smaller portion overall. So that’s what we are seeing in the market.

Cash Begdan - Merrill Lynch

Great. And also any commentary on the average contract size, the growth rate of that average contract size and how that is trending relative to the past few quarters, that will also be useful.

Steve Beauchamp

It's a good question. I think we'll give you a better sense of that when the year turns, when we've developed customers, but I think it’s fair to say that we’re not seeing any dramatic shifts in our historical trends with regards to increases in average customers, in terms of the more products that they are buying or the clients that we’re bringing on to the platform. These trends had been similar over time.

Operator

Thank you, and our next question comes from Michael Turn from Needham & Company. Please go ahead.

Michael Turn - Needham & Company

I wondering if you could talk a little bit about the kinds of assumptions that you might be making around the lead generation benefits that come from being a public company and I’m wondering if you’re seeing any benefits there thus far?

Steve Beauchamp

It's certainly pretty early for us to make that assessment. We obviously are seeing benefits as I mentioned earlier in the sales process. We’re seeing benefits with our employees in recruiting in our general brand recognition in the marketplace, and we’re also making additional investments in marketing above and beyond what we’ve done before to try to take advantage of that opportunity, particularly in areas like the broker channel. I would tell you that early reception has been positive, but impossible at this point for us to measure that.

Michael Turn - Needham & Company

Okay, and then with respect to assumptions around headcount growth of existing customers, it seems like the employment environment is on a bit of a path to recovery. I’m wondering if you have seen sort of any impacts there at all?

Steve Beauchamp

Yes. I would say, in a general growth environment, obviously our customer base would reflect what’s happening on an overall GDP perspective. So we do see our customer is adding a very small number of employees. It’s not enough to really move the needle for us, when you’re talking 40% growth rate. But it certainly is helpful.

Operator

Thank you. That’s all the time we have for questions. I would now like to turn the call back to CEO Steve Beauchamp for any further remarks.

Steve Beauchamp

Thank you very much Danielle. That will conclude our call for today. One final note, I will be presenting at the Raymond James conference on May 28th in San Francisco, and then again at the Bank of America Merrill Lynch Conference on June 4th, again in San Francisco, and then finally at the William Blair conference, June 12th in Chicago. And we’ll welcome the opportunity to share of story and look forward to speaking with you guys in the coming months. Thank you very much

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone, have a great day.

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