Good day, ladies and gentlemen. And welcome to the Paylocity Holding Corporation’s Third Quarter 2017 Fiscal Year Results. 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 Instruction] As a reminder, today’s conference call is being recorded. I would now like to turn the conference over to you, Peter McGrail, Chief Financial Officer. Please go ahead.

Good afternoon and welcome to Paylocity’s earnings results call for the third quarter of fiscal 2017, which ended on March 31, 2017. I’m 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 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 take 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 under our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. The non-revenue financial measures we will discuss today are non-GAAP unless we state the measure as GAAP. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to their directly comparable GAAP financial measure because the information which is needed to complete a 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 third quarter earnings call. We had a very good quarter with total revenue growth of 27.9% and recurring revenue growth of 28.7%. We were able to post strong revenue growth, while at the same time delivering a record level of adjusted EBITDA. Through the first nine months of this fiscal year, adjusted EBITDA is up more than 77% from the same period last year. At the time of our IPO, we outlined a long-term model of 20% plus revenue growth and 20% adjusted EBITDA margins. We are on track to make significant progress this fiscal year towards our long-term adjusted EBITDA target of 20%. The impact of ACA, our new sales continues to moderate as we see the market returning to historical buying patterns, where clients generally prefer to make a change at the start of each quarter and at the start of the new calendar year. This is also the case in our broker network, where we were pleased to generate more than 25% of our new business in the third quarter, consistent with pre ACA historical levels. As you may recall, broker referrals peaked in the first and second quarter of fiscal 2016 almost reaching 40%, and have since stabilized above 25% of the last several quarters. The Paylocity value proposition remains strong for brokers, as new technology entrants, increased legislation and commission reductions, all create pressure for brokers to differentiate and grow their business. Brokers appreciate our focus on delivering modern technology and they are taking advantage of Paylocity’s API, and our broker portal to deliver a seamless experience to their clients. Our most recent update to the portal, now provide the ability for a broker or financial advisor to send communications directly…

Thanks, Steve. Let me walk through the results in more detail. First and foremost, for those of you who may not be familiar with our business, we experienced fluctuations in revenues and related costs on a seasonal basis. Our third quarter revenue is positively impacted by a preparation of W2s for our client’s employees and by the addition of new clients that switched providers at the start of the new year. Our costs on this additional revenue increase during the same period. Total revenue for the quarter was $90.3 million, which represents a 27.9% increase from the year ago quarter. Total revenue for the first nine months of fiscal 2017 was $223.9 million, a 31.1% increase from the same period last year. Our total recurring revenue of $86.4 million was up 28.7% from the year ago quarter, and represented 96% of our total revenue. Total recurring revenue for the first nine months of fiscal 2017 was $215.1 million, a 32.5% increase from the same period last year. Recurring fees were up 28.7% in the quarter and 32.6% for the first nine months of the fiscal year and interest revenue increased 29.6% in the quarter and 27.9% the first nine months of the fiscal year, primarily as a result of our client growth and balance increases. Our average daily balance of funds held for clients was approximately $800 million for the first nine months of fiscal 2017. Implementation services and other revenue was $3.9 million for the quarter up 12.3% from the year ago quarter. Implementation services and under revenue is up 3.9% through the first nine months of the fiscal year from the same period last year. Adjusted gross profit in the quarter was $61.7 million representing a margin of 68.3%, as compared to $45.6 million or 64.7% in the…

Thank you. [Operator Instructions] And our first question comes from Justin Furby of William Blair & Company. Your line is now open.

Hi guys, thanks and congrats and Peter, certainly thoughts and prayers coming your way on that news, on your diagnosis. Steve, I wanted to start and ask about just the quarter and the linear you saw. And just curious if you saw any changes as you went along the quarter and into April in terms of sales cycles getting any faster some of the private vendors that we’ve spoken to have mentioned some improvement and particularly in the month of March. And I’m just curious if you saw that and then ADP highlighted some churn elevation both in the enterprise as well as mid-market, I’m just curious if you maybe you’re seeing a bit higher mix of business coming in from that channel or what you make of it.

Sure. So I’ll start with the last part first. I think we’ve consistently said, we don’t necessarily see a small change in ADPs retention, necessarily translate to either more or less momentum in our sales activity. We’ve consistently get the majority of our business from ADP and paychecks that was not different. We see them most frequently and a small movement in the retention really doesn’t drive it. So I wouldn’t highlight that as a change. On the first part of your question, the first part of the year wasn’t what we expected. The broker channel as you know declined much faster than we expected. And I think in my prepared remarks, I highlighted the fact that we’re starting to see clients back to the typical type of behavior we would see where they look to start in April and July and October. Clearly we have clients start every week and almost every day with us, but back to that kind of normalized behavior, where the evaluation process is starting to build towards those quarter start. So I think overall, we’re starting to see things normalize.

Got it. And then if you – from a sales productivity standpoint, Steve I’m just curious what you’re seeing from the class that came in last year and particular as well as the overall rep population for this year so far. And then I know you’re going to hiring right now for fiscal 2018. But can you give us a sense for how much of that you plan to be traditional channels of folks from the industry versus just some of the newer channels. Thanks.

Sure. So I think, overall from a productivity perspective, the first part of the year was a little bit tough, it was a very difficult comp, because we had so much activity last year at the same timeframe. We’re definitely seeing things on a year-over-year basis much better than we did the first half of the year. So I look at my productivity for the last quarter – the first quarter of the calendar year much better from a sales productivity perspective for sure. From a hiring perspective, we’re early in the cycle, frankly, we’ve really done a lot with our training and development process, we’re always tuning that, we feel like we’ve got a training and development process. That’s actually pretty consistent between reps that come from industry experience and reps that maybe have business to business sales experience, but not industry experience. So we’ve running through the same process, we don’t have different hiring groups and so we give the flexibility to our management team to go and find the best sales talent possible. So I would just be hazarding, I guess, at this point, what the mix looks like. I would imagine that we’re probably going to still see more industry hires, but they’ve got the flexibility to hire the best talent that they can find.

Got it. Thanks for taking my question and congrats.

Thank you.

Thank you. And our next question comes from Scott Berg of Needham. Your line is now open.

Hi, Steve and Peter, congrats on a fantastic quarter, and I was certainly some my thoughts. Peter, during this time, I guess, two questions I have. First of all, Steve, can you comment a little bit more on some of the new product sales that you’re seeing, you talked about expense and recruiting, but are most of those sales upsells existing customers, are they being attached to maybe the initial sales for your co-product.

Yes, good question. I would say most of the sales are being attach to new customers for sure. As we’ve talked about in the past we haven’t necessarily focused a lot of attention on upsells. We have been doing more of that starting with ACA last year and then maintaining an inside sales team this year. So some of our earliest customers on the product were current clients, and that’s kind of our typical cycle, get the current clients on release into new sales and then start to scale up from there. So most of it to new customers, but there are some current customers that we’ve upsell this part of those accounts as well.

Okay, great. And follow-up for Peter, I might have missed it in your prepared remarks as I was writing something down, I think you’re talking about your capitalized software development expense. As I look through the model that’s increased a little bit more than I would have expected the last couple quarters at your expense numbers coming down. I know we always look at those on combined effort, given your history there. But just trying to understand kind of what that looks like in the next maybe two to four quarters. And how does the run-off in terms of debt amortization want to hit. There’s going to be any different just because the level or is it tied to different projects, just trying to put that together, I guess.

Yes. You’re right and I would give the combined number, we think that’s the most important number to give, our total commitment to research and development. We capitalize according to GAAP rules, so we capitalize what we think we’re supposed to capitalize in conjunction with conversations with our auditors as far as amortization goes on that. We typically amortize those things over a very short period of time two years as our typical product amortization rate. But again, when we do projects we sit down and consider amortization timeframes and how long that product will last, when we go through those individual products.

Great. That’s all I had. Thanks for taking my question.

Thanks, Scott.

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. And Peter, all the best with your treatment, hope to see you back to health very soon. Question is actually both these questions are on the financial model. What should we expected gross margin trajectory to be as we – as March towards the 20% EBITDA roadmap.

Sure. So if you look at our guidance for the year now. We’re getting almost 17% adjusted EBITDA and have made some big improvements this year along that path. I think, we originally kind of think about probably 100% gross margin and then 100% maybe and kind of operating leverage. So roughly, 200 basis points is what we kind of look forward to start of the year, we’re going to obviously do a lot more than that this year. It’s not always linear. So we have to make investment decisions every year. But I think we feel good that the – that type of pace is kind of a good strong end. And then if we have better performance and that we get a little more and if we decide to make some investments maybe a little bit less. But that’s our thought process.

Okay, and then on the CapEx profile, given your new office locations and the replatforming effort. What do we expect the cadence of the CapEx to be, say, for the next four to six quarter, since that’s – looks like the time window of moving into new locations.

Let me just handle the first part of the question, which I’m not sure what you mean by the replatforming effort. I think our view on the product is we’re constantly refreshing it. We’re reacting to client feedback. But I wouldn’t tell you that we have some huge replatforming initiative by any means. So it’s more of just the fact that we’re investing more and maybe slightly longer term initiatives that’s driving the R&D part of the CapEx. And then maybe you could talk about the building in the rest of it, Peter.

Yes. So what we highlighted in that prepared remarks is that we are normal, we spend between 6% and 7% on non-capitalized software CapEx in any given year. We expect that to tick up, not in a major way, but tick up potentially over 7% over the next four quarters. As we start to move into our new headquarters in build up Boise.

Thank you.

Thank you. And our next question comes from Corey Greendale of First Analysis. Your line is now open.

Thank you. This is Ken Wang on for Corey. Thanks for taking my question, and Peter certainly our thoughts go out to you and your family. Just wondering, you’ve mentioned recruiting in the expense management modules, but are there any other modules that were especially successful in terms of sale during the quarter.

Sure. So, if a client were to buy all of our modules today they’re going to purchase about $280 per employee per year of product. Of course payroll everyone have to have. And then I think, I would tell you in terms of where we see a lot of momentum certainly the talent category. So in the talent category for us is onboarding, performance management, recruiting those all performed very well for us, we continue to see increases in time and labor and benefits, but if I were to highlight one category that might be a little bit more would be the talent category.

Thank you. That’s really helpful. And then, just looking at the Q3 revenue results and then revenue guidance, I was just wondering, was there any pull forward from Q4 into Q3.

No. I wouldn’t say that, I’m going to go back, if you take a look at what we’ve guided the last three quarters. So Q2 we guided about 21% at the midpoint. Q3 we guided about 25% of the midpoint. Q4 now we’re guiding about 23% of the midpoint. So I think we’ve actually had fairly consistent thought process around guidance, there’s a pretty transactional business, we’ve got to sell it, we’ve got bring it on board. And so I wouldn’t read in too much that there’s a different thought process happening with Q4, it’s really actually been pretty consistent, how we’ve looked at it the last couple years. And we feel good about 29% revenue guide for the year and 17% adjusted EBITDA.

Great, thank you and congratulations on a great quarter.

Thank you.

Thank you. And our next question comes from Ross MacMillan of RBC Capital Markets. Your line is now open.

Thanks you so much, and congratulations from you as well and again Peter my thoughts and prayers are with you too. Steve, just on the sales environment, how would you describe the new sales bookings in the quarter, relative to your expectation? I heard your comments on the broker channel getting back to that 25% of weak pass through. But just more generally, how would you describe the way that the March quarter turned out relative to your expectation.

Yes. So I think overall, we’re starting to see recovery really in the marketplace from a sales perspective. The first six months of the year, we’re a little bit of a surprise to us, part of that was certainly driven by the broker channel, which we’ve talked about. I think, we’re seeing clients go back to kind of a normal cycle of decision making we’re seeing good strong level of activity in the quarter. And when we look at our performance this past quarter versus last year from the sales perspective. We’re seeing some good productivity increases as well. So, I think overall positive, heading in the right direction.

That’s great. And then, you commented obviously, on recruiting and expense. As you think forward I know you don’t want to get everything in your roadmap. But maybe you could just give us an idea of some of the new investments that you’re making today vis a vis future products, either in terms of enhancements on existing or new products. And should we expect related to that – should we expect your PEPY sealing to continue to migrate higher, thanks.

Yes. So I think we had a goal little more than three years ago to get the PEPY from 200, at the time of our IPO to 300 per employee per year. So we’ve made very good progress. It’s still our intention to get to the 300 and frankly go beyond. So we certainly believe that we’ve got the initiatives in house that we’re currently working on that will have some incremental PEPY opportunity. We’re actively working on those we typically announce those wins they’re generally available. And I think across the categories from HR to time and labor to benefits and talent management. We think we have incremental PEPY opportunities that we could develop over time. And we’ll obviously announce and once they’re generally available.

Thank you so much, and congrats again on a great quarter.

Thank you.

Thank you. And our next question comes from Mark Marcon of R.W. Baird. Your line is now open.

Good afternoon. Peter my heart goes out to you, hope for all the best in a speedy recovery. And, obviously, terrific quarter here. I would like to come back to the – this is the pace or the sequential pattern in terms of revenue going from Q4 to Q3. It seems like it’s slightly bigger pullback sequentially than what we’ve seen during the past and obviously, we start the ACA. So can – was the ACA contribution a little bit greater this year in terms of the 1095 filings or anything specific.

So I think just take a step back from an ACA perspective, we don’t charge specifically for the forms. So we charge on a per employee per month basis. And it’s really part of us being able to keep the customer in compliance with ACA. And so, from that perspective there’s no [indiscernible] impact during the quarter. And no, we haven’t change what we think the impact is for the year, still 7% to 8% for the fiscal year for ACA.

Okay. I mean can you describe something else that might be impacting the sequential trend relative to what we ended up seeing last year.

I would say there’s really not necessarily kind of a big call out. Overall I think last quarter we guided to 24.6% or 24.5% roughly. In this quarter, we’re guiding at the midpoint to 23%. So I’m not sure our guidance is that different from one quarter to the next, I understand that we over perform this quarter. So sales had some good momentum that drove that level of over performance. But we’re in the middle of this quarter. So we’ve got to sell, we’ve got a service. We’ve got to implement – the customers at this point in time. So we feel comfortable with the guidance that we get with the 23% midpoint.

Okay. And then with regards to just the new sales that you’ve been getting. Can you talk a little bit about just the characteristic of the clients, are they still broadly concentrated in that 100 and 120 employee range. Or is there been any sort of noticeable change?

Yes. So I would say that our average size customers not change materially. So I think we talked at the start of the fiscal year being about 120 employees being our average side customer. We would absolutely be very much in that range still today and we’ll probably give you a better update at the end of the fiscal year, but no real change in terms of market focus for us.

Great, thank you.

Thank you. And our next question comes from Trevor Upton of Pacific Crest Securities. Your line is now open.

Hi, thanks for taking my question. Peter, I just want a quite a bit of answers comments as my thoughts and prayers are with you. We talked about the broker channel stabilizing, could you comment on if you’ve seen the stabilization from the in-house channel?

Yes I think in-house was a little bit less of a surprise for us. We saw in-house peak to get to about maybe high teens. So think of that a little less than 20% of all the new business that we brought on at its peak. Prior to that, it was really more in the mid teens. And so we’ve seen that kind of return back to historical levels I think that was something that we would have anticipated we didn’t necessarily think that was going to continue. So that has been the case really throughout this fiscal year.

Okay, great. And then, you previously also discussed your ability to ramp the entire sales team you – you haven’t done this past quarter. Any change in your thoughts around building that opportunity out.

So, I think the question about insight there is always comes back to selling more back to the client base. And I think our view is we will continue to sell more back to the client base gradually over time. And it will really be a combination of our outside sales reps, we’ll do some of that. And then we’ll also have an inside sales team that will also be kind of focused on that. And so I think this year we’ve probably done a little more of that than we did last year and the same thing the year before. So we’ll continue to do a better job selling back to our clients as our product portfolio continues to expand.

Great, and then just my last question. Do you have any thoughts on – have initial thoughts on fiscal 2018?

Yes, so I would say, we’re early in the planning process. So we typically don’t want to give guidance at this stage. We’ll give our full guidance last – next quarter obviously. I think you can look back at the last three quarters and get a sense of where we’re thinking the guidance has been, this is a run rate business, it’s a recurring model, as you know. So I would look at the guidance that we’ve had for the last few quarters and that’s probably gives you at least a little bit of insight in terms of how we’re thinking.

Great, thank you. That’s all I have. And Peter again, best wishes for speed recovery.

Thanks

Thank you. And our next question comes from Kash Rangan of Bank of America Merrill Lynch. Your line is now open.

Hi, thank you for allowing me to ask a question. This is Shankar on behalf of Kash. Peter my thoughts and prayers on with you. Great quarter, but many questions have been asked. I just want to like focus on the high level question. In the past – the customers on a yearly basis, you have the customers growing at like mid-teens, if exclude ACA and then your ARPU growth at low to mid-teens. And if you look at Q3 performance and then your guidance of Q4, can you give some color on how that’s progressing share from in this?

Yes so we typically give you the unit growth and then customer accounts at the end of the fiscal year. But if you track back over the last several years and you take out ACA contribution. Then we’re typically getting call it roughly 60% of our revenue growth from units and maybe 40% from ARPU. It’s a little higher – a little lower than that depending on the year that you’re looking at. So I wouldn’t tell you that – roughly that ratio is kind of where we would kind of expect to land nothing different happening there.

Okay. And if – on the broker may fall off 25%. In the past you said, the range is anywhere from like 25% to 30%, setting diagnose around 25%. But can you talk about what are the catalyst that you think would get it up to 30%, assuming excluding ACA the latest stuff. Is there anything that you hearing from the channel which you think that can actual rate through the year?

So taking your step back, we have historically given you a range of 25% plus and that does mean that it’s kind of in the more 25% to 30 % range. And then if we can consistently hit that next milestone like 30% then we will potentially up the range. So it is 25% plus. And so frankly it’s closer to 30% than it is 25% today. So it is actually fairly consistent with where we were historically. I think the trends in the brokerage channel more importantly are still strong for us, brokers are certainly trying to get more involved from a technology perspective. They’ve got a lot of changes in their business in terms of legislative changes and commission pressures and they’re looking to be more consultative with their clients. And so the opportunity to work with Paylocity really allows them to have influence over how the customers using our platform. They can be more consultative using our broker portal. So we think we’ve got a great value proposition for the broker. And we continue to bring on new broker relationships and get deeper into the existing client base of our current broker partners.

Okay. Thank you.

Thank you and our next question comes from Patrick Walravens of JMP Securities. Your line is now open.

Hi, this is actually Natasha on for Pat. Peter, wishing you the best of luck with your recovery there. So I have a couple questions. First, how would you characterize your overall tone of business? And second, has your segment in the market gone anymore competitive and what changes are you seeing there?

Sure. So the second part first. I would tell you that competition wise, we’re still seeing the same players that you would expect us to we’re getting the business from the same sources. It’s always been competitive in our business. So where early do we get into a deal where we’re the only player involved, there’s always the incumbent and sometimes there can be a couple other people involved. So it’s certainly competitive as we grow and as others in our space grow we’ll start to see each other a little bit more frequently. So I think a get a little bit more competitive over time, but nothing we’re calling out from that perspective. And then the first part of your question was…

Just how would you characterize the overall tone of your business?

Yes, I think I go back to my earlier comments around. Things are starting to normalize and steadily improving from what I would think was less activity than we expected the first six months of our fiscal year.

Great, Thank you.

Thank you. And our next question comes from Abhey Lamba of Mizuho Securities. Your line is now Open.

Hi guys, thanks. This is Parthiv on for Abhey. And Peter I let my thoughts and wishes for you. Can you guys comment on the quarter carrier performance during the quarter relative to plan and as you guys begin planning for next year. Can you give us any directional color on how freshman and senior core as a trending?

Sure, so I would tell you that we didn’t expect at the start of the year to see this level of retreat in the broker channel. And so I think our expectations at the start of the year were frankly a little bit higher. And I think we were very upfront about that, when we reported our second quarter and letting you know that. So when we look at the year as a whole we would not be able to reach those kind of original expectations that we had. However, as we start looking at the trend, which I think is very important. We’re starting to see momentum building in the sales force. We’re seeing year-over-year improvements, when we look at that productivity from what we saw in the first six months of the year.

Okay, got it. Thanks, and I want to follow-up with the initiative around solution consultants. Any update there or learning’s from the past couple of quarter since you started incorporate – into your sales motion.

Yes. So let me go back historically we leverage solution consultants maybe a little bit more selectively for the larger more complex deals. And we were able to observe a higher close ratio, when we have been involved. So at the start of this fiscal year we expanded the solution consultants and if we more than doubled them, and we got them involved in many more presentations. And so that has been a positive experience for us as a whole. I think over time we would love to be in a position where we can have solution consultant involved in virtually every deal. And so that has worked well for us, we’ll continue to expand that group and involvement as much as possible, and when you really step back and think about it that platform gets continued to get a little bit more complicated as we add components to it, and their knowledge about how customers can gain efficiency using our entire platform can really be helpful in the sales process.

Okay, great. Thanks guys and congrats.

Thank you.

Thank you. And I’m showing no further question at this time. I would like to turn the conference back over to Steve Beauchamp for any closing remarks.

Well, I’d like to thank all of you for your interest in Paylocity and your questions today I also would like to thank you for all your well wishes thoughts and prayers to Peter. And I know he certainly appreciates it, and it’s great that we got him here today on the call. Thank you very much.

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