Good day, ladies and gentlemen, and welcome to the Paylocity Q4 2015 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 be given at that time. [Operator Instructions] As a reminder, this conference is being recorded. I would like to introduce your host for today's conference Mr. Peter McGrail, Chief Financial Officer. Sir you may begin.

Good afternoon and welcome to Paylocity's earnings results call for the fourth quarter in full year 2015, which ended on June 30, 2015. I’m Peter McGrail, CFO, and joining me on the call today is Steve Beauchamp, Chief Executive Officer 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 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 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. The non-revenue financial measures we will discuss today are non-GAAP unless we state the measures as GAAP. 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 earnings call. Fiscal 2015 represents our first full year as a public company and I'm very proud of the results we have achieved. Let's start by reviewing few highlights for the quarter and fiscal year. Total revenue for the fourth quarter was up 40% year-over-year with reoccurring revenue of 41%. The fourth quarter results mirror our fiscal year 2015 results with 40% total revenue growth and 41% reoccurring revenue growth. We finished fiscal 2015 with record revenue of 152.7 million. Adjusted recurring gross margin increased 5.3% to 71.8% for the quarter up from 66.5% for the same period last fiscal year. The improvement in the adjusted gross margin was a combination of the reseller purchase completed in the quarter along with natural leverage in our business model. Adjusted EBITDA of 8.2 million for the fiscal year was up 52% from last fiscal year driven by improvement in recurring gross margins. Recurring gross margins increased 70.7% for the fiscal year up from 66.2% last fiscal year. We recently launched Paylocity's Enhanced Affordable Care Act module, a comprehensive compliance solution for our clients impacted by the impending ACA deadline. We continue to invest in our industry leading platform as research and development investment accelerated in the fourth quarter finishing fiscal 2015 at 14.1% when you combine what was expense in capitalized. During the fiscal year we won "Best Place to Work" Award in Chicago and for the first time in Rochester, New York. I'm very proud of the culture and enthusiasm displayed by our employees. We finished fiscal year 2015 with strong momentum in sales and marketing as we continue to execute our land and expand strategy. Our focus remains on landing new customers as we…

Thanks Steve. Let me walk through the result to provide some detail. Total revenue for the quarter was 40 million which represent a 40% increase from the same period in the prior year. Total revenue for the year was a 152.7 million and as with the quarter was up 40% from the prior year. This was our fourth consecutive year of 40% growth. Our revenues have two major components, recurring and nonrecurring. Our recurring revenue has historically represented about 94% of our overall revenues and are separated into two categories, first we have recurring fees attributable to our cloud-based payroll and HCM software solutions. Second, we earned interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittents [ph] to employees and taxing authorities. Given the current interest rate environment we do not derive the material amount of recurring revenue from this source, 1% to 2% of overall revenue. But we would be obviously benefited from an increase in interest rates. For the fourth quarter our total recurring revenue of 38.2 million was up 41% in the prior year and represented 95% of our total revenue. Recurring fees were up 41%, our interest income increased by 0.2 million or 52%, for the year our total recurring revenue of a 144.1 million was up 41% and represented 94% of our total revenue. Our nonrecurring revenues are comprised of implementations services and other, and primarily consistent of implementation fees charged to new clients for professional services provided to implement and configure our payroll in HCM solutions. We recognize revenue for these services when our implementations are complete. These fees typically represent 6% of our overall revenue on an annual basis. Implementation services and other revenue was 1.8 million for the fourth quarter…

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

Steve, I wanted to start by asking about tax rate and where they're trending, I am curious the past fiscal year what percentage if you could give, sort of rough sense of the new business in fiscal ’15 that was payroll only versus deals that are testing to other things and sort of how that's been trending and I was also hoping you can drill specifically on core HR attach and where that's been trending, and if you look at the fiscal ’16, where from a product standpoint you expect to see the most meaningful uptick in terms of new deals? So several questions.

Yes several questions, I think it got it down here Justin, thanks for the questions. So I think overall we don't give specific tax rates but I can certainly give you some color, there is no question that higher attach rate in core HR, talent management, time and labor and benefits are the driver of the 16% year-over-year increase in revenue per unit and that is really been driven by selling more to the new customers versus selling back to the base. So I would tell you that really we're seeing an increase kind of across the Board, in all of the categories outside of payroll that's driving that. I highlighted in my opening remarks that talent management had a good year for us so that would be probably the one out of the additional four categories that probably had good -- the highest year-over-year increase. I think you second part of your question was core HR, core HR is the highest attach rate of the other four categories, so it's certainly higher than time and labor talent management and benefits. We continue to see that rise. We don't have quite as much headroom there but it does continue to increase and we think that we have opportunities to increase attach rates in every category with the exception of payroll.

Okay and could you get into little bit more on ACA in sort of how you're thinking about monetization? These new forms, the 1095s, does that potentially cause greater seasonality in revenues this year in fiscal Q3 as you recognize that tax limiter? How should that play out?

Okay so first of all anytime we introduce a new product to the marketplace, we really try to get experience what the customers, learn from that, adopt and make changes both from a product perspective it could be what we bundled together, how we priced so I would say we’re very early in that stage right now. We have our enhanced ACA product that we've been introducing to customers. We're getting feedback from our customers. We do think there is a monetization opportunity but it's not the primary one we are focused on right now, the bigger thing for us is to make sure we satisfy the needs of our customer, they need that and that we really introduced what we have to the referral channel. I think the market as a whole is really circulating around what this look like from a monetization perspective. At this point in time we would not be changing the look around seasonality of revenue going into next fiscal year. We do think ACA represents a financial opportunity to us, but it's very early and very difficult at this point to give any color on what that looks like as the year roll on we hope to be able to give you a better insight.

Okay. Great. That’s helpful. And then you guys obviously could see that execute extremely well and I'm curious, if you look at over the next three years or so, if growth would have come down to say below 30% -- I don’t think it does, but if it were, what do you think would these are most likely driver that? Would it be just inability to find the right sales rep and talent because it get bigger whether the competitive changes, what do you think would be the biggest position hurdle here over the next three to five years?

I think we are certainly very proud of the consistency level of our growth rates. Several years in a row we’ve been at this 40% level, but the key point there is that’s been driven by over performance in our sales force. Our sales forces had phenomenal years and really from that perspective if we were to have a decline in our growth rate it would likely be tied to us not being able to have that same level of over performance that we’ve seen in the last several years. It certainly isn’t due to lack of opportunity, we still have a less than 2% share of a very large market place and so we feel like we have the opportunity to go after. We want to do in the quality fashion, I think you heard us a many times that we want to make sure the implementation experience is great for our new customers, so that is really our governor of growth but if we were not able to over achieve at the same rate we have historically, it would likely because we’re selling a little less in the market place.

Okay. That’s helpful and maybe one more Peter for you, last year you guys set out as EPS target at this time last year and you obviously beaded handily. I'm just curious is there any change to that approach in guidance this year -- if revenue outperforms in fiscal '16. Do you expect to let that flow though the bottom line? And I also wanted to drill specifically into gross margins this year and sort of what your guidance until there?

So we of course don’t guidance on gross margin, out over up. When we guide -- we had certainly tremendous performance in this last fiscal year and gross margins, we’ll call it 500 basis points on the round, so that was terrific. Primarily from resells but a certainly lot from natural leverage. I think in my prepared comments I mentioned that we don’t expect gross margin improvement to be linear overtime but certainly we would expect natural leverage to average out over an extended period of time to 80 to 100 basis points a year and certainly that’s a continuing goal of ours. And then concerning the initial part of your question, I actually -- could you tell me one more time?

It was just around your approach to guidance in terms of letting -- potential out revenue -- outperformance flowing through to the bottom line this year.

I think we think about in a couple of ways, we certainly have seen revenue over performance in the past. We certainly don’t count on it and I think when it happens we make decisions around whether we -- there are investment opportunities we ought to be taking, we ought to be hiring, so there is a lot that was into that decision. But we consider it carefully, if and when that over performance occurs.

Got it, thanks very much guys congrats again.

Thank you and your next question comes from Nandan Amladi of Deutsche Bank. Your line is open.

On sales capacity, Steve, as has been your practice once a year, you provided a go-to-carry a rep target for the year. That implies about a 30% growth and your guidance for revenue growth is also about 31%, historically those two have tracked together pretty closely. So the question is if indeed through the year you realized you are tracking ahead on the revenue side, would you be adding more sales capacity or is your focus more on R&D as us said in the prepared remarks?

Sure. So I think we've had a pretty consistent cadence around hiring from a sales perspective. Our hiring season is in this spring and then early in through the summer. We were fortunate to get all our quota-carriers in that kickoff, and that’s second year in a roll we're able to that. So very happy with that. There is a little bit of hiring that happens after the fact there is a turnover opportunistically, but largely we stick very close to that quota-carrying caring number for the balance of the year and then we look at what the productivity is in terms of driving overall sales capacity. So I don’t think that if we have different results than what we’ve forecasted that that would necessarily drive material different in terms of sales expansion. We will look at that again as we go into our budget season for the following year. We will plan for that, we'll start hiring again next spring and into the summer. And so we think cadence really works for our business.

And just a quick follow-up if I might on the attach rates, you touched on this a bit earlier but as the new products roll out, how should we think about the contribution from sort of increased attach rates versus -- into the new customer base versus perhaps of offsetting the existing base, I know the latter has not being a big emphasis for you historically?

Sure we will continue to focus on land versus expand as we go into next year and I think we’ve always indicated the expand part of the equation what come in at some point in time and it will come in a very gradual fashion. So I think at this point, we're still focused on land, we want add as many new customers as possible and gain market share. We certainly have a track record of being able to increase that average revenue per customer focusing mainly on land. If we see more demand in our customer base for some of the solutions that we have we certainly want to fill that demand, but we would see that in a gradual fashion. So I think the big message her is mostly land, once again this fiscal year.

Thank you. Your next question comes from Terry Tillman of Raymond James. Your line is open.

I'll keep myself framed in with my questions or at least a number of them. So Steve you guys are pretty transparent in terms of -- I think even in the filings you've given update on if the customer were to buy all your modules, at list what that per employee per year looks like, I mean you've even talked about now -- and you've emphasized the R&D investment as a differentiation and you've said you've even accelerated some of the hiring in the R&D at the end of the year, where are we trending now on that per employee per year and have you changed kind of the longer term goal on what it could potentially get to?

So I think first of all we're at $230 per employee per year and we did not change that from the update that we've made last quarter. We still have as an organization a target of long-term $300 million per employee per year and we think we have certainly a roadmap of that over an extended period of time will allow to execute towards that goal, so I think at this point in time we feel really good, where the product roadmap is. I think we're going to be able to leverage our ATA offering which again we're really trying to figure out the right pricing and model in the marketplace and we'll get better color as the year moves on for that module along with benefits and the momentum we had last year from talent management to continue to have success this year.

Got it and you do provide occasionally metric on how many brokers or third party are influencing business and you talk about that usually having a strong close rate opportunity. The 2000, how do we think about that in FY16 and beyond, is it more -- and you're talking spending more -- Peter talked about this in terms of the guidance you're going to spend more to really go after that opportunity, is it doing more with the same or should we see that number of 2000 grow significantly into ’16 and beyond?

Yes, so I think the first point I would make as you're right, Peter, in his opening remark said, since our IPO we've invested incrementally in our R&D and sales and marketing and I think if you go back historically, the keywords for sales and marketing is incrementally. And so I don't think by any means that was the statement of the past versus the kind of the future, but we will continue to invest in the broker channel. And we see it as both increasing the number of individual brokers that are providing us leads as well as getting more leads from the broker networks that we have. So we've seen both of those two opportunities in front of us. We think ACA creates a great opportunity with the subset of health insurance brokers and we've seen increased activity level with them and of course we're still seeing that channel close at higher rates than any of our other resources.

Thank you. Your next question comes from Scott Berg of Needham & Company. Your line is open.

Steve and Peter, I would like echo the sentiment on the great quarter. Two quick ones for me I guess, first one on the guidance Peter is, as the guidance suggest second half of the year is likely more profitable than the first half, is that a reflection of frontloading some of the new investments for the year or is there general other dynamic financial national leverage that occurs as we get through the next 12 months?

No, I think you’ve hit it on in your statement, I think -- you saw our R&D investment as Steve spoke about and I actually spoke about in the prepared remarks. We had a great opportunity to hire talent in R&D personnel. We took advantage of that in the fourth quarter, that will roll through the first couple of quarters but we're very excited about the opportunities that they present to us. So I think largely that’s what you’re seeing and as we prepare for ACA, we're actually -- as Steve mentioned in his remark, we're gearing up operationally so that we can -- Steve talked about the monetization things, bust separately the operation we have to handle those clients and want to provide them the best experience possible. So we've invested a little more in that operations possibly so we can assure ourselves that we can do that.

I think the last thing I can add to that comment is, we had a great selling season last January quarter and when we get a lot of business in that January quarter, we're typically staffing up the next couple of quarters after that to handle that because we -- as you know, we sell a customers, we get them implemented relatively quickly, so there is no backlog concept. So as the volume comes, we’re often hiring a little bit after the fact. So it's really combination of getting ready for the ACA having some opportunities to invest in R&D personnel which as you know are hard to find and we've been very successful at that and then just hiring up a little bit, this last quarter in predation for this fiscal year.

The one follow-up I have is on the R&D personnel, that was than the 15% of revenue when you count the expense in the capitalized components together that you kind of talk about recently getting to that level, should we think about ’16 in general as being elevated above 15% level or does that kind of normalized backed down to that 15% period at point here?

So as you know -- as I mentioned, I think finding great R&D talent is extremely difficult and so when our recruiting team and our executive team in R&D has opportunity to find additional talent, we have a robust roadmaps so we certainly have enough to invest in. We like to take advantage of that opportunity. So I don’t think we are tied to '15 as necessarily being an exact ceiling to that we certainly think we get great return on our R&D investments, so we would make them. Now at the same time I wouldn’t tell you, we think that dramatically different than the '15 is where we want to be. So if have the opportunity to go above '15 and think we get the return on it, we would make those investments. But I wouldn’t look at that as being dramatic.

Great. That’s all I have. Thanks for taking my questions.

Thank you. Our next question comes from Jim MacDonald of First Analysis. Your line is open.

I have a several questions on the ACA. Are you looking to bill that monthly like the industry seems to be doing and then also is there a big implementation component that might change the way we think about implementation both in revenue and costs?

I think Jim the first point I would make is, it's fairly dynamic when you got these government deadline and many of our competitors racing to a product for their customers and then getting feedback from their customers and reacting to that. So I would say to you is we’ve seen some changes early in our ACA lifecycle already in terms of what's happening in the marketplace. So it's a little early to give you real specific color. There are couple of models out there, there is a per employee per month model and we will have that available certainly. And then there is a perform models. It's difficult to give you a good sense of what that mix is. At this point in time we are not forecasting different seasonality of revenue, so we're just reacting to what we see early and we think we’ve got a lot of flexibility to deliver to the customers what they need, which is just really the most important part of the equation.

But just asking my question again in a different way, so are you staffing up on the implementation side?

So I think from us it's going be more ongoing -- these are customer who already are ready, we're providing ongoing service to them. We anticipate they are going to call us with many more questions. We obviously build our products so the customers have the ability to certainly help themselves from implementation perspective but they’re going more assistance than they would regularly need. But it isn’t necessarily a whole different implementation group along with implementation fee and so on. It's certainly a different elevated level of support for an extended period of time.

Can I ask a philosophical question about the ACA, like what percent of your customer base do you think it will apply to and what percent do you think you will get versus maybe other specialized ACA vendors or benefits administrators and people like that?

So obviously that’s certainly a magic question for us, early in this equation. We’d love to know the answer to that. It would be very helpful in many regards. However, I think philosophically, I do think that somebody who is already the payroll and HCM vendor has an opportunity to drive higher penetration rates. We certainly have ours, for many of our customers who are using our benefits. We have benefit information, if they’re using our time and labor system, we’re actually tracking that on a daily basis. So we think the fact that we have all those information already puts us in a much better position to be able to sell the solution versus a standalone provider. I think maybe at the upper end of our market, they might potentially look at standalone provider but certainly in the core 50 to several 100 employees, we think we have advantage.

One minor question especially for you guys. What are you thinking about for cheques per payroll going in the -- your guidance for next year?

I think the way we think about what's happening with our current customers, meaning how many employees our current customer’s employ and therefore how many they pay. With a little bit of growth economy we’ve historically seen a small percentage of growth within our client base. So I would tell you what kind of tracks to the economy as a whole, I’ve obviously don’t have any type of forecast on the economy as a whole, but what I would tell you, if the economy is growing slightly. Our clients are generally adding employees slightly as well and obviously the reverse is true. So I think that’s kind of more of a question around economic forecast, but we would follow what's happening in the macro environment.

Great. Thanks guys.

Your next question comes from Jeff Ustinov of Northland Securities. Your line is open.

So looking at the $80 million of cash here on the balance sheet as well as cash flow positive and having acquired two resellers, are there other types of acquisition that you would consider or are you 100% focused on organic R&D and in organic growth?

Sure. It's a big question. So I don’t if I would say we’re 100% focused on R&D and organic growth but we are certainly -- we favor developing our own product because we believe we can deliver a much more integrated user experience to our customers and we had great success building some of our new products offerings. So we certainly heavily favor an organic built versus any acquisition. That doesn’t mean we wouldn’t look at something if it fit, but we would be highly selective.

Great and as you growing your sales force 30% this fiscal year, what's the typical background of the sales people that you are hiring? Are they coming from the traditional bureaus like ADP and cerulean, or are you looking outside the payroll industry?

Sure I think one of our philosophy has been trying to get really experienced professional sales representative who generally at some point in their career had some exposure to payroll or HCM, we feel that that allows us to ramp them up a little bit faster, so doesn't mean they're coming directly from a competitor of ours, they might have that experience earlier in their career, have gone other places. But we do feel like that allows us to get better productivity in the sales force and a little faster ramp and so we've been consistent with that model through this hiring year.

Okay great and then last question for me is, as you think about international expansion is that way off on the roadmap or I assume it’ll probably be -- you’d probably go there first with you non-payroll products? Just some color there would be great.

Sure, I think we're definitely focused on the size of the U.S. opportunity in front of us. If you think about having less than 2% market share, being over 500,000 businesses in our core target market, we're going to stay focused on that opportunity. We think we can build very large business being U.S. focused. It doesn't mean that international can never happen by any means, it's certainly a little more complicated, but it's not something that's on our immediate radar screen.

Thank you, our next question comes from Patrick [indiscernible] of JMP Securities. Your line is open.

I have a couple of questions, my first one is, Steve you've mentioned at the beginning new technology that they represent competition for your insurance broker channel, possibly you're talking about things like benefits [ph], my question would be what size companies are those kinds solutions most appropriate for, like where does it really work?

Yes, I think we've certainly are seeing some entrants and you gave one example as well, that are focused on providing some technology in exchange for capturing insurance commission. We see those mostly at the very low end of our target market, if not, the majority of the activity even below our target market. And in many of our conversations with the brokers they would kind of echo that sentiment, so for very small customers, who haven’t really tried to automate anything, kind of some 20 employee might leak into lower end of the our target market, is kind of where we see at least today most of that activity.

Okay that's helpful and then you've touched on this, but just as investors think about your story over in the next 3 to 5 years, what would you, how you like them to think about what your target growth rate is? Not that the sales guys are overachieving and we realized some years you'll do better, but to generally how should we think about the growth rate for this and maybe one analogy that most investors are familiar with is, I know you are too, ultimate for a long time is at 25% recurring revenue growth, what's the equivalent for your guys?

Yes, I would say it's pretty early in our public life cycle having just gone through our first public year, I don't know if we have an internal philosophy that we would certainly be comfortable sharing about X is our target. We've had a very consistent historical model, we're certainly proud of that fact. I think we go at this year-by-year and provide you the best guidance that we have at the time. And so I don't know if we have that same type of philosophy that you see in other at this point.

And then last for me, everything metrics wise was really great and then the one place that you're off the consensus is on the EPS guidance versus the where the consensus was, and again you've touched it, but just so we have a really clear answer on it, Peter, what would you -- where would you attribute the spending that led to that difference for the consensus?

Just to be clear, in the quarter, non-GAAP net income in the quarter, in the year?

No we're talking about for the guidance for next year versus the street?

Okay, so on adjusted EBITDA or non-GAAP net or both?

EPS.

Okay so, on non-GAAP net, what we would say is that what we've done is -- the difference between EBITDA and non-GAAP net mostly is depreciation and amortization and it's just the nature of what -- of when we build products and our R&D investments and what we capitalized and when we depreciate them and we depreciate stuff on a fairly quick basis once we put them in service, so I think it's simply that math that has us depreciating a little more, I think, on EPS. Then you guys may have assumed though it's not out of the norm and our spending in line with what we would have expected and what we've done in the past.

Okay so the negative 4 to negative 8 versus the consensus of 2 that's the main reason?

Exactly.

Thank you. Our next question comes from [indiscernible] of Bank of America Merrill Lynch. Your line is open.

I had two quick questions, you've touched a little bit upon this earlier but, has there been any significant shift in the landscape, what you've been seeing on the market? There’s been a lot of movement in this space, maybe at the low end and possibly the high end, lots of move around the ACA, has that significantly changed? And the second question was just that the annual revenue attention rates that still greater than 92%?

Yes, I'll handle the second one first. The annual revenue retention rate is still greater than 92% that's correct. And then in terms of the competitive landscape I think the message is we really haven’t seen a lot of change, there has been a little bit more activity around ACA for us certainly in our broker channel and our client base. I think that's been a change within our industry as a whole where everybody is focused on, on that activity, but in terms of are we seeing different players, are we more or less successful against any one player than we have been in the past, the answer of that is no, it’s very consistent.

Thank you. At this time, I would like to turn the call back to management for any closing remarks.

I'd like to thank everybody for joining us on our call and hope that you all have a great evening.

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