Paylocity Holding Corporation (NASDAQ:PCTY)
Q4 2016 Earnings Conference Call
August 9, 2016 5:00 PM ET
Peter McGrail - Chief Financial Officer
Steve Beauchamp - President and Chief Executive Officer
Justin Furby - William Blair & Company
Scott Berg - Needham & Company, LLC
Terry Tillman - Raymond James Financial
Nandan Amladi - Deutsche Bank
Mark Marcon - Robert W. Baird & Co. Inc.
Jeff Houston - Northland Capital Markets
Brad Reback - Stifel Financial Corp.
Patrick Walravens - JMP Securities LLC
Jeff Van Rhee - Craig-Hallum Capital Group LLC
James Macdonald - First Analysis
John Byun - UBS Securities LLC
Good day, ladies and gentlemen, and welcome to the Paylocity Q4 and Fiscal Year 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today’s conference call is being recorded.
I now like to turn the conference over to Mr. Peter McGrail, Chief Financial Officer. Please go ahead, sir.
Good afternoon, and welcome to Paylocity’s earnings results call for the fourth quarter and full year of 2016 which ended on June 30, 2016.
I am Peter McGrail, CFO. And joining me on the call today is Steve Beauchamp, CEO of Paylocity. Today, we will be discussing the results announced in our press release, issued after the market close. 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 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 on 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 measures as GAAP.
Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to their directly comparable GAAP financial measures, because the information which is needed to complete the reconciliation is unavailable at this time without unreasonable effort.
With that, let me turn the call over to Steve.
Thank you, Peter. And thanks to all of you for joining us on our fourth quarter and fiscal 2016 year-end earnings call. Fiscal 2016 was a tremendous year for Paylocity, as we achieved a number of key milestones. Total revenue for the fourth quarter was $59.8 million, an increase of 49.6% with overall revenue growth for fiscal 2016 of 51.1%, as we finished the year with $230.7 million in revenue.
We also expanded adjusted EBITDA from $8.2 million in fiscal 2015 to $28.4 million in fiscal 2016, a 690 basis point improvement as a percentage of revenue.
The acceleration in our revenue growth this fiscal year was driven by the successful launch of our Enhanced ACA product combined with record-breaking performances by our sales team. Our sales team continues to focus on landing new clients. As a result, we increased our total clients by 21%, ending this fiscal year with 12,500 clients versus 10,350 at the end of fiscal 2015.
We were also able to increase the penetration rates of our human capital management offerings. The increased penetration of our HCM module along with the adoption of our ACA Enhanced product resulted in 25% increase in annual revenue per client. The average recurring revenue per client for fiscal 2016 was 17,600 versus 12,000 just two years ago.
Broker referrals continue to be a key sales driver, representing more than 30% of our new business revenue for fiscal 2016. The complexity created by ACA along with the increased demand for modern HCM application creates pressure for broker to differentiate and grow their business.
These market trends along with execution by our sales and marketing teams allowed us to generate more referrals from current partners. Well, at the same time increasing the number of referring brokers by more than 20% versus last fiscal year.
We recently held our annual sales kickoff bringing together our sales teams from across-the-country to Chicago. We have the opportunity to celebrate a successful fiscal 2016 and launch a number of new marketing, training and sales initiatives to position us for success in 2017. These meetings also provide a great opportunity to welcome all of our new sales hires.
We were once again able to recruit and hire our targeted number of quota sales reps prior to our kickoff event. We have completely staffed our sales team, increasing sales rep headcount by 25% and entering fiscal 2017 with 205 sales reps. I had the opportunity to meet our new hires and spend time with all of our top performers in July, and there is a tremendous amount of energy and excitement, as we enter this new fiscal year.
In addition to completing the expansion of our sales force, we also decided to more than double the number of sales solution consultants. The solution consultants are product experts that are skilled in demonstrating the value of our platform, and have played a key role in expanding productivity per rep over the last several years.
We plan on incorporating them more frequently in the sale process in order to better differentiate our solutions, taking advantage of our investments in research and development. We continue to believe the investments we are making in our SaaS platform create differentiation in the market. And the strength of our product portfolio remains the primary reason, why businesses are selecting Paylocity for their payroll and HCM needs.
As a result, we continue to increase our investment in research and development throughout fiscal year 2016. Total research and development was up 50% for the fiscal year, when you consider what we expend and capitalize. We have a robust product roadmap. And our investments in research and development position us to extend our industry-leading platform.
We made significant progress this past fiscal year launching our enhanced ACA offering, refreshing our user experience, and improving our data integration capabilities with our new API.
Our most recent product release includes a number of features that extend capabilities across all of our categories, including the launch of E-Verify services, recognition leaderboard and performance journals in talent, photo-capture and points tracking in time and labor, and our new analytics chart focused on easily pinpointing employee turnover trends across the organization.
I am also pleased to announce that we are launching our new recruiting product available for new clients starting in January 2017. We have a number of beta clients already using the recruiting module and have received very positive feedback. The combination of enhancement across all of our categories plus the addition of recruiting increases the price of our complete platform from $250 per employee per year to $270 per employee per year.
Fiscal 2016 represented a very busy year for all of our operation teams with record revenue growth combined with increased activity related to ACA compliance. I am very proud of the effort from our operational teams, as we experienced increased demand for assistance from current clients focused on complying with ACA regulations for the first time.
We have been focused on hiring earlier in operations and have made great progress this past quarter. This positions us to train and develop our new employees prior to increase year-end volumes, which we anticipate starting earlier due to the large number of clients, who have signed up for our ACA Enhanced product.
We also have agile product teams focused on continually launching enhancements that provides our operational teams improved ability to onboard new clients and better managed client request across the organization. This combination of service and technology allowed us to once again deliver revenue retention of greater than 92% for fiscal 2016.
We are very proud of the Paylocity culture and are honored to have won Best Place to Work award this past fiscal year in Chicago, Orlando and Rochester, New York. I’m also very proud to announce that Paylocity was recently named to Selling Power magazine’s 50 Best Places to Sell For list for the second year in a row.
We have received very positive employee feedback from these surveys and on social media sites such as Glassdoor. The key to our success lies in our ability to attract and retain talented employees across all disciplines.
Last fiscal year, approximately half of all new hires were referrals from current employees. We work hard to create a culture of transparency, where employees are empowered to make a difference and our employees rewarded by referring qualified candidates that fit our culture.
I would like to thank our more than 1,800 highly-engaged employees for all the efforts in making our second full fiscal year as a public company a success.
I would now like to turn the call over to Peter to discuss our results in more detail.
Thanks, Steve. Before we review our results in detail, I’d like to highlight that the company achieved a significant milestone in fiscal year 2016. For the first time ever, payroll processing revenues were less than half of overall revenues, as the penetration of our HCM products continues to increase.
Total revenue for the quarter was $59.8 million, which represents a 49.6% increase from the same period in the prior year. Total revenue for the year was $230.7 million, up 51.1% from the prior year. This was our fifth consecutive year of 40% plus revenue growth, as we continue to see strong demand for our unified payroll and HCM solution with fiscal year 2016 being particularly strong, as we saw wide adoption of our comprehensive ACA solution.
For the fourth quarter, our total recurring revenue of $57.8 million was up 51.3% from the prior year and represented 97% of our total revenue. Recurring fees were up 51.6%, while interest income increased by $0.2 million or 35.6%.
For the year, our total recurring revenue of $220.1 million was up 52.8% and represented 95% of our total revenue. Implementation services and other revenue was $2.1 million for the fourth quarter and $10.6 million for the fiscal year, up 12.9% and 22.8% respectively from the same period last year.
Strong implementation services revenue growth resulting in 21% client growth for the year was offset by a decline in other revenue. Other revenue, the largest portion being clock hardware purchases declined, as clients move towards mobile or other advanced time capture solutions. Separately, implementation services revenue growth is also impacted by our product mix.
As I noted earlier, for the first time ever, payroll processing revenue represented less than half of our total revenue. In general, HCM modules come in less implementation fees in the marketplace than payroll. So if this trend continues, we would expect less overall implementation services revenue growth moving forward.
We are also pleased to report that our annual revenue retention rate which is always calculated on a trailing 12-month basis remained above 92%, as it has for several years.
Adjusted gross profit in the fourth quarter was $35.6 million, representing a gross margin of 59.5%, as compared to $23.1 million or 57.7% in the fourth quarter of 2015, an improvement of a 180 basis points. This improvement was primarily the result of revenue overperformance and natural leverage.
Adjusted gross profit for the full fiscal year was $141 million, representing a gross margin of 61.1%, as compared to $87.2 million or 57.1% for the prior year, a 400 basis point improvement. We are very pleased with the progress we have made, since coming public in our adjusted gross profit margin. Over the past two fiscal years, we have increased our adjusted gross profit by a total of 860 basis points, which is a combination of leverage from our two reseller acquisitions, strong revenue overperformance and natural scale as our business grows.
We view our adjusted recurring revenue gross margins as the best barometer for our overall long-term margin opportunity, as we generate these margins on the vast majority of our revenues. Our adjusted gross profit on recurring revenues was $41.5 million or 71.9% in the fourth quarter, up slightly from $27.4 million or 71.8% in the year prior.
Adjusted recurring gross profit was $161.2 million or 73.2% for fiscal year 2016, up from $101.9 million or 70.7% in the year prior, a 250 basis point improvement. We continue to invest in research and development. In addition to significant new modules, such as ACA, we are equally committed to refreshing and modernizing our platform to maintain and extend our technological advantage. In order to understand our overall investment in research and development, it is important to combine both what we expense and what we capitalize.
On a combined non-GAAP basis, total research and development investments were $9.6 million or 16.1% of revenue in the fourth quarter compared to $6.7 million or 16.8% in the year ago quarter.
Full year research and development investments were $32.2 million or 14% of revenue compared to $21.5 million or 14.1% of revenue in fiscal year 2015, a 50% increase in our total investment in research and development. On a non-GAAP basis, sales and marketing expenses were $16.2 million or 27% of revenue in the fourth quarter, as compared to $11.3 million or 28.1% of revenue in the same period last year.
For the full-year sales and marketing expense was $57.3 million or 24.8% of revenue as compared to $39.7 million or 26% of revenue in the prior year. We continue to be pleased with the recurring fees growth we are experiencing based on this level of investment in sales and marketing.
On a non-GAAP basis, general and administrative costs were $10.8 million or 18.1% of revenue in the fourth quarter, as compared to $7.4 million or 18.5% of revenue in the same period last year. Full-year general and administrative costs were $38.4 million or 16.6% of revenue, as compared to $27.2 million or 17.8% of revenue in fiscal year 2015, a 120 basis point improvement. We continue to be pleased by our ability to consistently leverage general and administrative costs on an annual basis, as we steadily move closer to our long-term range of 10% to 15% of revenue.
Our adjusted EBITDA was $3.3 million for the quarter versus $0.6 million for the year ago quarter. Our adjusted EBITDA for the year was $28.4 million or 12.3% of total revenue versus $8.2 million or 5.4% of total revenue in the year prior, a 690 basis point increase.
For the fourth quarter, non-GAAP net loss was negative $0.4 million or negative $0.01 per share based on 51.1 million basic and diluted weighted average common shares outstanding. For the year, non-GAAP net income was $15.9 million or $0.30 per share based on 53.5 million pro forma diluted weighted average common shares outstanding.
Briefly covering our GAAP results, for the quarter, gross profit was $33.3 million, operating loss was negative $5 million and net loss was negative $5.4 million. And on a full-year basis, gross profit was $132.6 million, operating loss was negative $3.6 million, and net loss was negative $3.9 million.
In regard to the balance sheet, we ended the year with cash and cash equivalents of $86.5 million. From a cash flow perspective, we generated $33 million in cash from operating activities in the year ended June 30, 2016, as compared to $11.1 million from the prior year.
Finally, I’d like to provide our financial guidance for the first quarter and full-year of fiscal 2017. Total revenue for the first quarter is expected to be in the range of $63 million to $64 million or approximately 40% to 42% greater than the prior year. Adjusted EBITDA is expected to be in the range of $4.5 million to $5.5 million. Non-GAAP net income is expected to be in the range of $0.5 million to $1.5 million or $0.01 to $0.03 per share based on approximately $54 million diluted weighted average common shares outstanding. Total revenue for fiscal 2017 is expected to be in the range of $296 million to $298 million or approximately 28% to 29% greater than the prior year.
Adjusted EBITDA is expected to be in the range of $36 million to $38 million. Non-GAAP net income is expected to be in the range of $19 million to $21 million or $0.35 to $0.38 per share based on approximately $55 million diluted weighted average common shares outstanding. As you think about our quarterly results, remember that our revenue grew a record 61% in the second quarter of fiscal 2016 creating a challenging comparison.
As a result, we would expect revenue growth in the second quarter of fiscal 2017 to be lower than the revenue growth in the third and fourth fiscal quarters of 2017. Given this revenue color, it would follow along that the second quarter, but also result in a challenging comparison for adjusted EBITDA and non-GAAP net income as well.
One final note, Steve and I will be attending the Deutsche Bank Technology conference in Las Vegas on September 13.
In summary, we are very pleased with our operational performance during the fourth quarter and full 2016 fiscal year. Operator, we are now ready to begin the Q&A session.
Thank you. [Operator Instructions] And our first question comes from Justin Furby of William Blair. Your line is now open.
Thanks, guys, and congrats on another stunning quarter. Steve, I had two - I guess, high level questions. The first is, it seems like if you look out over the last 18 months or so, the big focus in the payroll market has clearly been around ACA. And, I guess, if you out over the next 18 to 24 months, what do you think the focus will change to? And then I’ve got a follow-up. Thanks.
Yes, I think ACA is a big part of the conversation going through the second year of compliance. It was a little bit of a whirlwind I think for our customers in the first year. But I don’t think there is another ACA like event that we see coming down the pipe. Certainly the FLSA change is the conversation piece. We don’t see that as a big revenue opportunity.
So I think it’s going to be more about upgrading to the most modern architecture or saving our customers time, getting them more efficient and keep driving that supervisor and manager utilization.
Great, and then, I guess on the recurring rollout in January, there are other vendors in the market having lot of success there. I guess, can you remind us the types of attach that you guys see with some of your mature talent applications like Performance Management? And where you think recruiting can go from an attach perspective over the medium-term? Thanks.
Sure, some of the other Talent Management components for us would really be Onboarding and Performance Management. And we see kind of attach rates in the teams, so between 10% and 20%. It would seem us [Technical Difficulty] recruiting we could certainly generate similar types of attach rates, if not, go higher longer term.
Got it. Thanks very much.
Thank you. And our next question comes from Scott Berg of Needham. Your line is now open.
Hi, Steve and Peter. Congrats on a very nice quarter.
Couple of quick ones for me. First of all, Peter, you talked about your payroll processing fees in 2016 were less than 50% of revenues for the first time in the company’s history. What’s the right way to think about that going forward? Does it kind of stick in this? My guess is 40% to 50% range or do you think that mix is maybe lower than that range at some point in the future?
Yes, this is Steve. I’ll start off with that. So if you think about the fact that payroll has not necessarily grown as a category for us in terms of new offering. All our new product offerings are in the other HCM components. So with 21% kind of client growth this past year, you would anticipate payroll being somewhere around there and most of the increased revenue per customer coming from the HCM category.
So if we continue to be successful rolling out new products and getting additional penetration in the HCM category, then we would anticipate that payroll as a total percentage would continue to come down a little bit.
Sure, got it. And then last question for me, Steve, is your sales reps - you increased your sales reps 25% year over year. It sounds like they’re fully loaded, ready to go, for fiscal 2017. Can you talk about your plans to add during this fiscal year and how you start thinking about the capacity increases going into fiscal 2018?
Sure. So we generally do most of our hiring during the spring and into the summer time for the following fiscal year. And there is just a little bit of replacement hiring that happens between now and next spring. So at this point in time it’s a little early for us to give additional thoughts to what those numbers might look like next year. It’s really a mix of how much revenue can we drive.
And based off the revenue targets then our sales team determines the right number of reps, we’ve been able to generate productivity increases from our sales force historically, so that’s a big factor into the equation. But I think it’s a little early for us to give you some color on the following fiscal year.
Great, that’s all I have. Congrats again on a great quarter.
Thank you. And our next question comes from Terry Tillman of Raymond James. Your line is now open.
Hey, guys, good afternoon. Thanks for taking my questions. And also I’d echo the other comments, great job on the quarter.
Steve, I guess, philosophically, I mean you’ve got some good problems on your hands. I mean there seems to be a capacity constraint, I mean, the demand is there. But one of the opportunities that I am curious how you think about resource allocation is this expanding product set. You’re spending 16% of revenue when you include cap [ph] software on products. What about maybe, not necessarily pivoting, but even adding more resources to go back into this increasingly large install-base and start selling more of these products to the install base versus maybe opportunistically?
Yes, we are still squarely focused on landing new customers, and most of that average revenue per customer increase. Once again, this fiscal year was driven by selling new clients more products. So it’s a fair question around expand.
I think ACA was our first experience expanding back to the client base. We are very successful in both launching the product and getting strong penetration rates. Now, that’s a must-have product, but we certainly learned a lot from that. And so as we move into this next fiscal year, we would look to very gradually start to go back to the customer base.
We wouldn’t do it with very many reps. It would not be a key focus. We’re still going to focus on land. We think it’s frankly an easier problem for us to solve, so good experience last year. We do a little bit more with other products this year, but still the main focus is landing new clients.
Okay. And, I guess, Peter, it’s a model-question and it’s not trying to pin you down for looking out a couple of years and anything, pin-point guidance. But as we think about these add-on products, the non-payroll products it does sound like maybe we could steadily see a shift. If that is the case - or an allocation of revenue come from those non-payroll products.
If that’s the case, how do we think about services build over the next three to five years? I mean could it just be as a percentage of revenue. And I know it’s not even a big a line item, but how do we think about it? Could it - in terms of the growth rate and/or just its contribution versus the high margin recurring. Thank you.
Yes. So as I talked about in my prepared remarks, we certainly have seen a shift in to more HCM products which is in the marketplace, have a less implementation fee associated with them. And I think I followed that up with, if that trend would continue we would essentially see implementation services revenue potentially decline in the future because of that dynamic.
We also have this [Technical Difficulty] implementation services in other, called other. And one of the big pieces of that is clock hardware. And we see less and less companies actually wanting clock hardware, actually come into a more modern version, say, a kiosk sort of paradigm for themselves. So I think overtime if the current trends continue we will see implementation revenue growth slow a little bit.
Okay, all right, thank you.
Thank you. And our next question comes from Nandan Amladi of Deutsche Bank. Your line is now open.
Hi, good afternoon. Thanks for taking my question. So, Steve, as you’ve grown bigger sales people have come to over 200 people now. How does productivity and the quota allocation vary between sort of the younger cohort versus your more tenured sales people and does the broker referrals factor into the productivity overall?
Sure. So we definitely see increased productivity, as sales reps are with us, they’re in for more years, which is not a surprise. And certainly one of those drivers is our more tenured sales reps, due typically receive more broker referrals. Now having said that, are we seeing some of our real top rookie performers really get connected to the broker network very quickly and have success? So it’s certainly not black and white.
We generally have three levels of quota, our most senior people kind of our - I kind of think of those as second year and then rookies. And over the last several years, we’ve been getting productivity increases in all three of those categories, so kind of across the board.
Thanks. And a quick question on the R&D, as your portfolio is now grown, you talked about a few new products that you’re launching like recruitment. Do you still see any big gaps left to fill? And does R&D become a source of leverage over the near- to mid-term?
Yes. So I think we’ve always talked about R&D long-term being in the 10% to 15% range. We’ve been at the upper end of that, I think 14-ish% this year. And so I think we are still at a stage, where we want to continue to invest in the product. If you remember back at the time we went IPO a little more than two years ago, our total product platform was $200 per employee per year. We now have moved that in a little more than two years to $270 per employee per year.
We definitely believe we’ve got the initiatives identified to get to $300 per employee per year over time. So at this point in time that’s still our primary focus. It’s continuing to invest in R&D, differentiate the platform and add additional products for our customers.
Thank you. That’s all for me.
Thank you. And our next question comes from Mark Marcon of Baird. Your line is now open.
Good afternoon. And let me add my congratulations, terrific quarter and terrific year. Can you talk a little bit about the revenue per client in terms of - you saw a 25% increase? Can you talk a little bit about the sources of that increase in terms of how much of that was just going back into the existing client base and selling the ACA versus selling more modules to the brand-new clients that signed up with you relative to perhaps an increase in terms of the size of the clients that you’re selling?
Sure. Also I’ll give you a little bit of color. If you look back over the last couple of years, our average revenue per customer increase has been in that mid-teens and so 15%, 16%. And so this year 25% is certainly a higher number. I would tell you that without giving you the exact numbers, if you backed out ACA, it would be pretty similar to what we’ve seen over the last couple of years.
And most of that is really selling more products to new customers. There is a little bit of customer size in there, there can be a little bit of pricing. But the large majority of the average price increase is really selling more HCM products to new customers.
On average, when you’re getting a new client, how much out of the potential PEPM, how much are you typically selling now?
Yes, we don’t disclose a specific number to give you what the new sales amount is of the total per employee per year opportunity. It’s certainly has increased - certainly every year, but we don’t give a specific number on that.
Okay, but I mean we can kind of [indiscernible].
You can kind of back your way into it.
Yes, you can back your way into it.
Great, and then, just with regards to the size of the clients that you are seeing now with your increased reputation, what are you seeing in terms of client size changes, if any?
Yes, so I would tell you that pretty consistently over the last several years client sizes inched up several employees each year. Some of that is - the clients that you lose are generally little bit smaller, because those are more likely to go out of business. The clients that you’re bringing on pretty similar size actually might be slightly larger, but not a big movement. So we’ve not moved market segment, we’ve just kind of crept up a little bit in terms of size, I think about that is a few employees per year and so fiscal 2016 was no different.
Great, and then, I’ll jump back in the queue. One last question, just with regards to the guidance, I assume that the gross margin is expected to continue to increase. I’m wondering what - which area between R&D, and sales and marketing you would expect to see the largest increase in over the coming year, as we think about the EBITDA guidance?
So I think sales and marketing is a little bit difficult. We’d love our sales team to have a great year, and then obviously have some increase expense associated with commissions and so on. So we wouldn’t necessarily come out of the gate and anticipate a big leverage number there. We are still certainly focused on growth. We have gotten some leverage in G&A, as you seen over the last couple of years. R&D, we’re still in investment mode, so we are not forecasting anything dramatically different than this year on that line item.
I’d say we’ve certainly annualized our reseller acquisitions increases. We had a tremendous year, ACA contributed to that. There is certainly not another product like ACA, out there for us to sell. So when we talk in general, we’ve spoken in the past, of sort of grinding it out as we go forward in these types of year, so 80 to 100 basis points movement is sort of - overall sort of what we pinpoint.
Great. Thank you very much.
Thank you. And our next question comes from Jeff Houston of Northland. Your line is now open.
Hey, Steve and Peter, thanks for taking my questions. Earlier, I think you mentioned that 10% to 20% attach rates for the newer products, was that just customers that are taking on any particular product or is it those that are utilizing the full suite, just a little bit color on that?
I think the question - yes, I think the question was specific to Talent Management, which for us is Onboarding and performance management. And in that category, we are seeing attach rates in 10% to 20% range, specifically in that category.
Okay. Then, how about for the full suite then? I imagine it’s a subset of that?
Yes, so just give you some color on that. We don’t give specific attach rate, but Time & Labor would be the category that we see the next highest level of penetration after payroll, and then followed by that we would - actually let me back up a step. HR, so core HR, then Time & Labor, and Talent Management and benefit are kind of in a similar range.
Got it, okay. And then Peter separately, shifting over to ACA’s impact on next year. It sounds like the major quarter it’s going to affect is the second quarter in growth and profitability. What’s the impact on the other quarters in the year, if any?
Yes. So, certainly we had full penetration, let’s talk a little bit about it. We had 61% growth in the second quarter, followed by essentially 50% and 50%, so we had ACA impact in all three quarters. The most significant impact was in the second quarter, if you recall, not only we were fully penetrated, but we had a lot of clients who were scheduled to start in January pulled their starts into that quarter, which repelled that quarter forward even greater than the other two. But we would expect those comparisons, ACA type comparisons for the latter three quarters of our year. That’s why I think you see us with the guidance we have for the first quarter, guidance for the year and then we try to give you some level of quarterly guidance the rest of the way.
All right. Thank you.
Thank you. And our next question comes from Brad Reback of Stifel. Your line is now open.
Great, thanks very much. Steve, is there a material difference in retention rates between just payroll customers and those that own a full sort of suite or several products?
I think conceptually we certainly believe the more a customer utilizes our platform and gets benefit from it, the better opportunity we have from a retention perspective. And so we’re focused on that. It’s not something we get into specifically in terms of the exact numbers. But that is one of the reasons that we do try to drive utilization, as we do believe that their customers are ultimately getting more value associated with it.
We also see dynamics where the slightly larger customer tends to buy more of the platform. So there is other dynamic that go into retention than just the amount of product that they’re using, but it is a factor.
Great, so as you sell more product into new customers and you get a lift in size of new customer adds, at what point should we start seeing retention move higher?
So we’ve got 92%-plus retention for our history. We think that is a best-in-class number for midsized organizations. And so our goals is to be able to maintain that 92%-plus.
Got it, thanks.
Thank you. And our next question comes from Patrick Walravens with JMP Securities. Your line is now open.
Great, thank you. So I’d love to talk a little bit more about the recruiting product. And, Steve, I’m wondering what do your customers do for recruiting now and sort of what were the key features that this product needed to offer to help them out?
So we have a number of customers on beta right now using the application and we continue to garner feedback for them. And we believe we’ve got enough feedback that we’ll make a few more changes through this fall and have this ready for January 1. But I think one of the key parts to the value proposition is having a recruiting platform within their overall HCM platform.
And so, if you think about a really common use-case like I need to post a job and hire somebody new, at the same time I can post that internally and externally, solicit employee referrals as well as try to get candidates from outside the organization. So that’s one of the value propositions we’ve seen our early customers enjoy.
Great, thank you. And then the other thing I thought would be really interesting would be just to touch on what your philosophy is around your sales hiring and sort of your go-to-market versus some of the other payroll companies?
Yes. So we start our kind of sales process by working with our sales leaders and discussing how much revenue, overall new business revenue we think we need for the following year. We obviously would prefer to drive higher productivity within the sales force and have fewer sales reps. From our perspective, that’s the right long-term formula. And one of the ways that we do that is the broker referral strategy.
So the ability for a new sales rep or a tenured sales rep to be able to go to 10 or 15 or 20 people within their territory, and generate even a referral or two a year makes that job much more scalable, gives us a better opportunity to drive productivity. And there is some marketing brand name recognition that we get along with that.
So I think the combination of experienced sales reps really focused on broker model and really trying to drive productivity increase over time are kind of what we look at every year, when we do our sales strategy planning.
Great, thanks very much.
Thank you. And our next question comes from Jeff Van Rhee of Craig-Hallum. Your line is now open.
Jeff Van Rhee
Great, most of what I need is already answered, just a couple remaining for me. As you’re moving, as the mix obviously shifts more to the HCM side, any even modest notable differences in terms of the competitive landscape at the end of the cycles? Who you see, how many you see?
Yes, I would say, we’re seeing the same people in the marketplace we have historically. It’s largely the traditional providers, the ADP and Paychex of the world, is largely who we see in the mid-market. Think of a customer with a little more than 100 employees. They really do like to have one single stop to get all their HCM needs. So just because we’re entering in a recruiting market, we don’t necessarily see a lot of standalone recruiting competitors.
A lot of people that we would be targeting are probably going to be using a fairly manual process and automating with us for the first time.
Jeff Van Rhee
Okay. Okay, good, all set. Thank you.
Thank you. And our next question comes from Jim Macdonald of First Analysis. Your line is now open.
Yes. Good year, guys. A little more on the FLSA, could you tell us what the statuses of your product and why you don’t think there is a revenue opportunity there?
Well, so I’ll just talk from a competitive landscape perspective. I think all of us are focused on how do we help our customers comply with FLSA. And so, that involves making sure they understand which employees they may need to change, they may need to start paying hourly or they need to make wage adjustments for.
We have the tools and capabilities within our platform to help our customers, identify those employees. If they need to track more hourly employees going forward, we already have a Time & Labor offering that a lot of our customers take advantage of. So if more of our customers would like to do that that would be a good thing for us. While, we don’t think there is a separate individual revenue opportunity where we would charge for an FLSA module. And generally speaking, we do see some bundling and packaging around those capabilities, but we don’t see people individually selling that module in the marketplace.
So there’s no additional revenue for kind of compliance checking, next year when - to see if peoples have to self-report-ish?
Part of our core HR platform has a lot of HR compliance, whether it’s OSHA reporting or VETS-100 reporting, and if they’re going to need to do in the normal EOC reporting. And so the capabilities that we have to be able to identify the employees and managed FLSAs are all part of our core HR platform.
Okay. And just one philosophical one, so maybe it’s similar to the last question, but you’re a core payroll company offering HCM modules, how do you view the HCM companies that are out there selling either just HCM or maybe HCM with attached payroll?
Yes, so when we look at the competitive landscape, it hasn’t changed much as I just mentioned recently, it’s mostly the traditional payroll providers that we see - we see regional payroll providers, we see in-house software players. We don’t run into anybody that maybe came from an HCM background on any level of frequency that - it’s something that we’re least focused on today. Certainly it’s possible for others to do that, it’s something that we watch competitively, but we haven’t necessarily seen that change the market dynamics.
Thank you. And our next question comes from John Byun of UBS. Your line is now open.
Hi, thank you. Going back on the recruiting module, is there a way to think about relative pricing to somebody out of modules. I mean could it drive meaningful contribution in the second half?
I would tell you that we increased the total platform from $250 to $270 per employee per year, so by $20 per employee per year, most of that $20, although not all of it is really kind of what we’re tagging for the recruiting module. So it’d give you kind of a sense in terms of relative impact. We are not launching until January, these things do take a while for ramp, it does take - took us a little while to get our other Talent Management modules even in that 10% to 20% range. So I don’t think it’s going to have a big impact this fiscal year, but certainly sets us up for another revenue stream for years to come.
Okay, great. And then going back to the FLSA, is that one area where you could do more of a cross-sell, maybe even for the time and labor module. I mean, when you talk about gradually increasing some of the cross-sell efforts where would that be in? Thank you.
Yes, I think, FLSA has a positive impact at all from a revenue perspective, which we take would be relatively small, it could certainly result in more demand for time and labor solutions, if there is more hourly employees that need to be tracked, which we would anticipate there would be a slight increase. I don’t think it’s a big impact, but it could be a slight positive for us.
Okay. Thank you.
Thank you. And this concludes our question-and-answer session for today. I’d like to turn the conference back over to Mr. Beauchamp for closing remarks.
Well, I’d like to thank all of you for your interest in Paylocity. And I’d also like to thank our more than 1,800 employees for just a fantastic fiscal 2016. Thank you very much everybody.
Ladies and gentlemen, thank you for participating in today’s conference. This does conclude the program. And you may all disconnect. Have a great day everyone.
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