Paylocity Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 3, 2023

There are 13 speakers on the call.

Operator

Welcome to Paylocity Holding Corporation 4th Quarter 2023 Fiscal Year Results Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, we will take a question and answer I would now like to turn the conference over to Ron McKenzie. Sir, you may begin.

Speaker 1

Good afternoon, and welcome to Paylocity's earnings results call for the Q4 fiscal year 'twenty three, which ended on June 30, 2023. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp and Toby Williams, co CEOs 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.

Speaker 1

Before beginning, we must caution you that today's remarks, including statements made during the question and answer session, contain forward looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward Looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward looking statements.

Speaker 1

Also, during the course of today's call, we will refer to certain non GAAP financial measures. We believe that non GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward looking non GAAP financial measure to their directly comparable GAAP financial measure because the information which is needed to In regard to our upcoming conference schedule, Toby will be attending the Stifel Tech Executive Summit in Deer Valley on August 29th and the Citi Global Tech Conference in New York on December 7th, and I will be attending the HR Tech Conference in Las Vegas in mid October. Please let me know if you'd like to schedule time with us at any of these events. With that, let

Speaker 2

me turn the call over to Steve. Thank you, Ryan, and thanks to all of you joining us on our Q4 fiscal 'twenty three earnings call. Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and help drive total revenue growth of 34.7% in Q4. For fiscal 2023, we reached a Key financial milestone for the company with total revenue crossing the $1,000,000,000 threshold and finishing at just under 1,200,000,000 or 37.8 percent growth over fiscal 2022. Our solid results were once again driven by both adding new clients and employees and increasing average revenue per client.

Speaker 2

We ended fiscal 2023 with 36,200 clients compared to 33,300 at the end of last fiscal year, an increase of 9%, while total employees on the platform grew by mid teens consistent with the historical growth trends and in part driven by the success We're seeing upmarket as larger clients realize the benefits of our sustained investment in product development and the most modern platform in the industry. Revenue retention also remains strong at greater than 92%. Average recurring revenue per client was over $30,000 in fiscal 2023 compared to just over 25,000 in fiscal 2022, an increase of 19% as a result of increased employees on the platform, Rising product attach rates across our client base and success with larger clients. We continue to attach more product at the time of sale and have realized increased success selling back into existing clients as our products focused on the most modern workforce resonate across our entire client base. Our sustained investment in product development allows us to continue to expand our product suite, evidenced by the recent announcement of several new premium offerings and feature enhancements, including advanced scheduling, learning management and market pay.

Speaker 2

Advanced scheduling builds upon our existing scheduling capabilities by adding advanced features such as the ability to match Similarly, new enhancements to our learning management module allows users to easily create and share new training via community, including a new safety training bundle of 20 courses to help clients ensure on the job safety and compliance. Lastly, the most recent addition to our suite of modern workforce solutions, MarketPay Allows our clients to easily explore, track, manage and compare market pay data across different job families and positions to help make better compensation decisions, evaluate specific roles accurately and comply with pay and equity job posting requirements in multiple states. Collectively, these 3 new product offerings, Along with continued investment across our product suite has increased our PEPY to $500 achieving the target we set 4 years ago. As a result, we are now raising our PEPY target to $600 and are confident in our ability to achieve this goal in the coming years as we continue to develop and deliver market leading new products. Our commitment to product development continues to be recognized in the market with Paylocity recently being named an overall leader in 10 HCM product categories in G2's summer 2023 grid reports.

Speaker 2

Additionally Paylocity was recognized as TrustRadius top rated HR management software platform for 2023, won the 2023 best human Technology Solutions in the SIAA Business Technology CODI Awards and achieved the leader ranking in Nelson Hall's 2023 nextgen HCM Technology Neat Report for both the SMB and mid and large market segments. Our strong culture, industry leading software and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal 2023, I'd like to thank all of our employees for a fantastic year. I would now like to pass the call Toby to provide further color on the quarter fiscal 2023.

Speaker 3

Thanks, Steve. As Steve highlighted, we continue to build upon our differentiated value proposition of providing the most modern As evidenced by one of our professional services clients with over 300 employees already leveraging market pay to analyze compensation for comparable positions to ensure its pay remains competitive and to help attract and retain high quality talent in an increasingly tight labor market. In Q4 and fiscal 2023, This dynamic was reflected in solid sales execution across our entire target market and we plan to continue investing in go to market initiatives to carry this momentum forward into fiscal 2024. We've expanded our sales force for fiscal 2024 by 18% from 6.94 sales reps in fiscal 2023 to 820 reps in fiscal 2024 and I'm pleased that we're fully staffed heading into the new fiscal year. We also continue to invest in our channel initiatives And we remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in Q4 and full fiscal 'twenty three.

Speaker 3

In addition to an 18% increase in sales reps for fiscal 2024, we remain committed to continuing our investments in digital marketing and digital lead generation to support our go to market motion. As a result of our strong financial performance, including our adjusted EBITDA margin of 31.9% And free cash flow margin of 18.4 percent in fiscal 2023, which puts us well into the range of our current financial targets, we are increasing certain of our targets beginning in fiscal 2024. This is a reflection of our strong financial performance in fiscal 2023 and I'm very pleased with our ability to continue to grow while demonstrating the scalability and leverage in our business model. While Ryan will provide additional detail, we're pleased to continue to target 20% plus total revenue growth with an increased adjusted EBITDA margin target of 35% to 40% of revenue and an increased free cash flow margin target of 20% to 25% of revenue. The strong culture at Paylocity continued to be recognized externally this fiscal year as we were named to Built In's Best Places to Work and among the best and brightest companies to work for in the nation.

Speaker 3

Additionally, for the 2nd year in a row, We also earned a placement on the Forbes list for Best Companies for Diversity and Best Employers for Women. Echoing Steve's comments, I would like to thank I would now like to pass the call over to Ryan to review the financial results in detail and provide fiscal 2024 guidance.

Speaker 1

Thanks, Tobey. Total revenue for the Q4 was $308,500,000 an increase of 34.7 percent with recurring and other revenue up 24.3% from the same period last year. As Toby noted, our sales team had another solid quarter and we were pleased to come in $5,300,000 above the top end of our guidance range. Adjusted EBITDA for the Q4 was $100,600,000 or 32.6 percent margin and exceeded the top end of our guidance by 4,100,000 For fiscal 2023, adjusted EBITDA was $375,200,000 or 31.9 percent margin, resulting in leverage of 400 basis points versus fiscal 2022. Additionally, we made significant progress on free cash flow with fiscal 2023 margin of 18.4%, up nearly 6.50 basis points and an increase of 111% on a dollar basis from fiscal 2022.

Speaker 1

We remain confident in our ability to continue expanding free We continue to make significant investments in research and development and to understand our overall investment in R and D It is important to combine both what we expense and what we capitalize. On a combined non GAAP basis, total R and D investments were 15.2% of revenue in the 4th quarter And on a full year basis, total R and D investments were 14.5 percent of revenue. On a dollar basis, our year over year investment Total R and D increased by 45.7 percent in fiscal 2023 when compared to fiscal 2022. We continue to believe our investments in R and D provide us with valuable product On a non GAAP basis, G and A costs were 10.7 percent of revenue in the 4th quarter versus 13.2% in the same period last year. Full year G and A costs were 11% of revenue as compared to 12.9% in fiscal 2022 and we remain focused on consistently leveraging our G and A expenses on an annual Briefly covering our GAAP results for Q4, gross profit was $211,700,000 operating income was $49,400,000 and net income was $37,300,000 For the full year, gross profit was $807,600,000 operating income was 155,000,000 And net income was $140,800,000 In regard to client held fund and interest income, our average daily balance of client funds was $2,500,000,000 in Q4 and $2,400,000,000 for fiscal 'twenty three.

Speaker 1

We are estimating the average daily balance will be approximately $2,300,000,000 to $2,400,000,000 in Q1 of fiscal 'twenty four with an average annual yield of approximately 410 basis points. On a full year basis, we are estimating the average daily balance will be $2,500,000,000 to 2,600,000,000 in fiscal 2024 with an average yield of approximately 4 20 basis points. Our guidance includes last week's 25 basis point increase, but does not Since setting our current targets in August of 2018, our adjusted EBITDA has increased from 21.5 percent of revenue to 31.9 percent of revenue, an improvement of over 1,000 basis points. And our free cash flow margin has increased from 12.9 percent of revenue to 18.4 percent of revenue, a 5 50 basis point improvement. As a result of our strong financial performance and the scalability of our business model, we are revising certain key financial targets, which we expect to make progress against beginning in fiscal 2024.

Speaker 1

In regards to total revenue, our goal of 20% plus growth remains our target And we continue to be confident in our ability to achieve this goal. Our adjusted total gross margin target is increased to 75% to 80% from 70% to 75%. Our general and administrative spend target is reduced from 10% to 15% of revenue to 5% to 10% of revenue. Our adjusted EBITDA target is increased to 35% to 40% from 30% to 35% and our free cash flow margin target is increased to 20% to 25% from 15% to 20%. Please refer to our earnings press release for additional details.

Speaker 1

Finally, I'd like to provide our financial guidance for Q1 and full fiscal 2024. For the Q1 of fiscal 2024, total revenue is expected to be in the range of $314,100,000 to $318,100,000 or 25% growth over Q1 fiscal 2023 total revenue. And adjusted EBITDA is expected to be in the range of $89,500,000 to $92,500,000 which represents approximately 250 basis points of leverage over Q1 of fiscal 2023. And for fiscal year 2024, total revenue is expected to be in the range of $1,405,000,000 to $1,410,000,000 or approximately 20% growth over fiscal 2023. And adjusted EBITDA is expected to be in the range of $464,000,000 to 468,000,000 which represents approximately 120 basis points of leverage over fiscal 2023.

Speaker 1

As it relates to the broader macro environment, Workforce levels continue to be roughly flat in all material respects. This is contrary to what we have historically experienced in a normalized business environment with recurring revenue typically benefiting from 2 to 3 points of growth driven by broader GDP expansion and workforce levels. Our guidance assumes this trend of flat workforce levels continues in Q1 and fiscal 2024 and thereby representing an equivalent of 2 to 3 point headwind to recurring revenue growth. After crossing the $1,000,000,000 threshold in fiscal 2023 and with continued investments in our go to market motion and product roadmap, We entered fiscal 2024 with a high level of confidence in our ability to continue to drive strong revenue growth, while simultaneously scaling our business and driving continued adjusted EBITDA and free cash flow leverage. Operator, we are now ready for questions.

Operator

Thank Our first question comes from the line of Brad Reback with Stifel. Your line is open.

Speaker 4

Great. Thanks very much. Steve, if we think about the 18% increase in sales force headcount entering the year, As well as the success you're having driving higher ARPU into the base, any reason we shouldn't think of 18 is the absolute bottom, and in fact, not being able to do a little better than that on the subscription side? Thanks.

Speaker 2

I think, if you look at our guidance, it hasn't changed from a philosophy perspective. So we're at the front end of the year and there's a lot of In front of us, being able to guide to total revenue of 20 percent revenue growth, we feel really good about. We've got all the heads, on board and up and running, which Always a goal for us at the start of the year. We've got a product suite that we have enhanced pretty significantly, and so we feel pretty good about the momentum. Certainly, our guidance wouldn't contemplate us being below the 18% on a recurring basis.

Speaker 2

So I think that's a reasonable way to think about it, but we feel confident in our ability to Hit the goals and I think we have a history of being able to do even better than our initial guidance.

Speaker 4

Perfect. Thanks very much.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Speaker 5

Hey, great. Thanks for taking our question. This is Sheldon on for Raimo. As your product portfolio grows with adding the new capabilities and talking about the $600 per employee per year target. How are you thinking about revisiting your installed base and kind of the installed base opportunity, Particularly as we enter a more normalized growth environment, is there any opportunity to lean more into up sell motion in 2024?

Speaker 5

Thank you.

Speaker 2

Sure. We really started selling back to the client base back in 2018. So we've been doing that for a number of years. And we've been increasing that inside sales team at a much faster rate than the rest of our sales force really since we started back in 2018. So That team did really well this past fiscal year.

Speaker 2

We were really happy with their success. We are certainly increasing that team beyond the Average 18% headcount, and so it will have a more material impact going into next fiscal year, but it still represents a small portion of Overall revenue growth. We are still focused on primarily landing new customers, and then continuing to enhance Our product portfolio, therefore, giving more products for our inside sales team to sell back to the client base. So yes, it's the right way to think about it. That will gradually Continue to get bigger and it is growing faster than our outside sales team.

Speaker 5

Great. And a quick follow-up, if I may. It's nice to see the, I would say faster than peer generative AI roadmap. I was just wondering how are you feeling about AI ML talent, engineering talent at your organization And just more broadly thinking about R

Speaker 2

and D headcount investment. Yes. So I think I'll take the second part first. So from an R and D headcount We've been pretty consistent when you look at what we expense and capitalize being around that 15% of R and D. This is definitely a competitive space.

Speaker 2

It's a pretty dynamic workforce environment where we have lots of product ideas that we get from our customers and that we feel we can add to the product suite. So We've maintained a pretty steady level of R and D investment when you look at it as a percentage of revenue, and I think that philosophy is what we have going forward. There's Lots of things that we think we can do to enhance our portfolio. On the first part of your question, we really started a data practice team about 4 years ago. And so if you go back, we've had predictive capabilities in our platform around who might leave a customer.

Speaker 2

We've got our MWI Based off algorithms and so we've had a team that's been investing in that space for a while. I think that's what allowed us to get to market relatively quickly With the generative AI capabilities both in community and now in job descriptions and we've got a long list of places where we think we can continue to add those capabilities for our customers.

Speaker 5

Great. Thank

Speaker 2

you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Bryant Bridget with TD Cowen. Your line is open.

Speaker 6

Hi, guys. Good afternoon. Thank you. Wanted to kick off with kind of a fiscal 2024 growth cadence question. So as we think about What you guided to here in the 1st Q guide relative to the fiscal 2024 growth guide, particularly on recurring, can you give us a sense whereabouts you anticipate the recurring growth Cadence to kind of trough out

Speaker 3

at? Yes, I mean, maybe I'll start, Ryan, to jump in too. I mean, I think when you look at the 1st half of the year, obviously, that's where the hardest comps are relative to last year. And I think overall, we feel very good about the guide that we Going back to Steve's comments a few minutes ago, just getting guiding to that 20% mark for the fiscal year. And I think obviously, like I said, I think the first half is the toughest from a comps perspective, but I think we feel pretty good about the momentum that we have across the business from a recurring perspective.

Speaker 3

I'm certainly excited about a lot of the product announcements that we've made and feel pretty good about the adoption that we've seen across the portfolio In the products that we had announced and I think while it may take it's early days for the things that we've just announced, you probably start to see More actual impact from that when you get to the back part of the fiscal year. But I think from a momentum perspective, feel pretty good about what we're seeing from a sales Feel pretty good about the momentum we have in new product release and adoption and feel I think Overall, feel very good about being able to guide to 20% for the fiscal.

Speaker 6

Okay. Okay, makes sense. And a follow-up on the long term target. So it's nice to see the grace on EBITDA and free cash flow margin. Within gross margin and G and A Specifically, can you talk about some of the bigger sources of expansion?

Speaker 6

Just obviously, I'm just saying natural leverage on broader scale, but are there other key levers you have here to discuss That gives you that confidence? Yes.

Speaker 2

Sure. I think gross margin, we've consistently expanded since IPO 2014. And I think The reason for us being able to do that is you hit one of them scale, but I think the second one is a lot of the new products that we've added, don't always require the Same list, either from an implementation or ongoing service perspective. You think about the 3 additions that we had now, those are all incremental from a gross margin perspective. So as we see Our revenue mix shift some of the newer products we've added, we get natural lift in gross margin, and that's probably the biggest driver.

Speaker 2

Thank

Operator

you. Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Speaker 7

Yes. Thanks for taking my question and follow-up. I guess, maybe the first question just relates, I think in the prepared remarks when you all were quoting some of the stats, Mid teens employee growth and I think you talked about larger customers. Was there anything notable in 4Q about the mix of bookings coming from larger customers and kind of any quantification on Is the size of the larger customer increasing? And the second part of this question is based on the 18% sales capacity growth, Do you foresee maybe a mix shift from where the business is coming from large, midsize or smaller customers in FY 2024?

Speaker 2

Sure. I think the last part of your question is, we did have a mix shift if you go back several years ago. First, we kind of And below our original target market, and then we expanded up in our target market. We started to see success, up market in particular at an Accelerated rate and we put more resources against that. I think that was the case over the last couple of years, but that is probably steady now.

Speaker 2

We really feel good about the mix that we have in each segment and we think about the growth rate of the 18% headcount growth being fairly similar across each of the segments.

Speaker 7

Okay, great. And just a follow-up is on, I think there was a comment about workforce level being flat for 1Q. Did you say anything about like the assumption or what you're thinking about for the full year on workforce levels, same thing or any different dynamic? Thank you.

Speaker 1

Yes, Terry, this is Ryan. I think the same approach and I think we've been consistent with this methodology going back really at the beginning of the pandemic. So we guided to what We can see and as we said in the prepared remarks, workforce levels have effectively been flat really going back 12 to 13 months at this point. So we assume flat levels Certainly for Q1, but for the balance of 24 and we'll certainly watch those and update you all as we get deeper into the fiscal.

Speaker 7

Okay, great. Thanks.

Operator

Thank you. Please stand by for our next question. Our next question is from the line of Brian Peterson with Raymond James. Your line is open.

Speaker 7

Hi, gentlemen. Thanks for taking

Speaker 2

the question. So Steve, I wanted to hit on AI, but maybe through a different lens. I think one

Speaker 7

of the things that people are talking about is the ability To really accelerate product and software development cycles, I'd be curious to hear how you guys are thinking about using it internally? And do you think that can have a meaningful difference in Either the margins or how quickly you can develop new products.

Speaker 2

Sure. Yes, I think just stepping back, I think will impact every part of the business, whether that's how we service customers and onboard customers, whether that's how we're building software products and using generative code, building tools, And then whether it's capabilities that we can actually deliver to the customer that drives efficiency for them. So we're looking at all aspects of it. We've certainly been Actively using that behind the scenes, I think we found a lot of success generating test use cases from a code perspective. That's probably where we get kind of are on that journey.

Speaker 2

But we are pretty passionate that this is a really interesting opportunity across all aspects of our business.

Speaker 7

Great. And maybe just a quick follow-up. I know you mentioned the 18% growth in the sales headcount. Any comments on how the tenure of that group looks And thoughts on expectations for fiscal year 2024? Thanks, guys.

Speaker 3

Yes. Hey, Brian, it's Toby. I mean, I think overall, we came into the year fully staffed, which we're really happy about. That's been the case over the last few years at least and Came into this year growing the sales force at 18% consistent with what we did last year. And I think overall feel really good about the mix of talent that we have in that.

Speaker 3

Certainly, askew as we would have historically done towards folks coming in with industry experience, Which has always been productive for us and I think we're overall really happy with how we're staffed as we come into fiscal 2024.

Speaker 2

Thanks guys.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Walravens with JMP Securities. Your line is open.

Speaker 8

Hi. This is Owen Hobbs on for Patrick. Thanks for taking the question. So I'm curious about the like a customer's timeline for kind of ramping up with product So if they'd like to say start out with a payroll product, how long would it take them to kind of adopt other products in the suite?

Speaker 2

Yes. So I think you can look at it through 2 different ways. So one is, if you we talk about the number of employees that we've got On the platform, the average size customer that we have, we give you the employee count. You can really calculate that realized PEPY, which has typically been 50% to 60% of our maximum PEPY. And so that gives

Speaker 1

you a sense because we bundle

Speaker 2

and package, that gives you a sense of what they're buying in terms of the total available opportunity. So there's still lots of opportunity to drive that higher. And so that's probably the easiest way to look at it. I think conceptually as we build new modules, we definitely feel like that We can get that module into the 10% to 20% range over time. That gives us the ROI and the conviction to be able to kind of build something for customers.

Speaker 2

Some of our modules are 50% plus product penetration rate. We've got some still below that 20%, but we've got to have conviction that we can get into that range before we actually build and launch a product.

Speaker 8

Awesome. Thank you. And then, so I know this isn't like the main focus right now, but thinking kind of longer term, the expansion opportunity within a business, Kind of how much of that is driven by the increase in a customer's employee count versus increasing PDPY by new products?

Speaker 2

Yes. So historically, in a growth GDP environment, we say GDP was growing 2% or 3%, we would typically get 2% or 3% In our client base of additional employees, which translates to roughly that same revenue growth number because people pay us on a per employee basis. So that was pretty typical. As Ryan mentioned, for over a year now, the number of employees on the platform has been flat. So our clients Are losing employees, but they're also not adding employees.

Speaker 2

So there's no necessary tailwind from that. So really at this point, when you look at the results we're delivering, there's no help from Extra employees on the platform, that all just comes from us selling new customers clearly. And so it's really being driven from Selling more to every new customer that's kind of coming on board, and then having that inside sales team I spoke about earlier actually selling back to the client base, That second part being a smaller portion than the first. Awesome. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Berg with Needham and Company. Your line is open.

Speaker 9

Hi, guys. Congrats on the quarter and thanks for taking my questions here. This is Michael Rackers on for Scott today. I was just curious kind of on your thoughts and maybe some commentary around the opportunity with the global payroll space. I mean, do you see international kind of as the next stage of growth over the long term?

Speaker 9

And just what are your kind of thoughts on the general trends there? Thanks.

Speaker 2

Sure. Yes, so I think we're definitely squarely focused on the opportunity in the We'll have relatively low penetration in terms of the target market that we're going after. So, we see a huge TAM that we've got to focus on. And we definitely got a Product set that we think creates differentiation. Where we do see a need to be able to have some global capabilities is when you've got a U.

Speaker 2

S. Headquartered Customer who may have some number of employees abroad. And so that's why we obviously had purchased Blue Marble and integrated that into our suite. So we can handle that need for So they can be a Paylocity customer and they can pay their 10, 20, 30, 50 employees abroad through Blue Marble and the network of partners that we leverage. So that has been our strategy globally.

Speaker 2

And we'll always look for interesting opportunities, but our primary focus We'll be U. S. Headquartered companies and with the size of the TAM that we've got in front of us, we think there's plenty of opportunity there. Awesome. Thank you.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samana with Jefferies. Your line is open.

Speaker 9

Hey, good evening. Thanks for taking my questions. Maybe first one, just as I think about The bookings cadence or linearity in the quarter, can you maybe just help us understand how From April to May to June trends, when? And how does that compare to normal booking seasonality in a fiscal Q4?

Speaker 3

Hey, Todd. I mean, I don't think we saw anything different from a linearity perspective in terms of the bookings coming in. I mean, I think, Obviously, when you look at as I said a few minutes ago, when you look at last fiscal year, you had heavy compares coming in, in the first half. But I think as we got No, back half of this last fiscal year, I don't think we saw anything different in terms of seasonality or difference in performance Quarter to quarter or then year over year from a sales perspective. I think the only thing probably note is just going back to comments that we've made over the last Probably handful of quarters and that Steve made a few minutes ago just in terms of probably seeing incrementally better performance upmarket.

Speaker 3

But I think that just reflects Probably the strength of the solution and what we've done from a product perspective just being more competitive there over time.

Speaker 9

Great. And I'm going to ask a sales related question. I've never worked in sales, so please indulge me if this is a bad one. But I'm curious when you think about just the unit count growth of sales reps,

Speaker 2

does it does unit does the number

Speaker 9

of heads matter as much You're targeting larger deals, do more reps work on a larger deal or is it still the same number assigned? Just how should we think about targeting larger

Speaker 2

Yes. So, we have consistently quoted sales reps based off Annual recurring revenue and new annual recurring revenue. Now sales reps' natural behavior is they will go for the larger customers because there's more employees there and that Give them more new revenue. But the reality is, we also get a significant business through broker referrals. That's over 25% of our business.

Speaker 2

So you kind of got to follow those leads wherever you can find them. You get client referrals, so you kind of follow wherever you go. So you can't purely just And the last thing I would say, we also talked about the fact that some of our most experienced reps, we've specialized in having them focus Market. So that's another way that we don't get everybody chasing the bigger deals that we focus on the best and most experienced people to go after those larger customers and that's been a good formula for success

Speaker 9

Great. Appreciate taking my questions. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Mark Mahon with Baird. Your line is open.

Speaker 7

Hey, good afternoon and thanks for taking my questions. I've got two questions. The first one is basically, can you talk a little bit about The pipeline you're currently seeing, how does that compare to a year ago? How active is it? Any reason to think that sales force productivity and conversions wouldn't be as good as they have historically been?

Speaker 2

Yes, it's a good question, Mark. I would say there's no real big call out when we look at the pipeline. The pipeline is growing nicely as we add reps and they continue to Put more opportunities in top of funnel. It's a little challenging from a history perspective. You think of COVID and all the environment that You came out of COVID, you had a little bit of a bounce out of COVID in terms of people not having done things for a while.

Speaker 2

We're now kind of getting back into a more normalized environment. And so I think as we continue to see the pipeline build and we look at that almost from a pre COVID level, we feel really good about the activity levels that we're seeing and how we're ramping New reps.

Speaker 7

Great. And really appreciate the updated financial targets. You're targeting roughly 120 basis points of margin improvement for this year. How should we think about the cadence Of the margin improvement towards going towards the top end of the target range when we strip out the impact of Float, in terms of the interest income.

Speaker 1

Hey, Mark, it's Ryan. I think if you step back And probably think about the journey we've been on since we set those initial targets 5 years ago in August of 2018. I referenced A few data points in the prepared remarks on adjusted EBITDA and free cash flow leverage that you've seen over that period of time. And as you said, we Sit here well into the previous targets and I

Speaker 3

think continue to have a lot of

Speaker 1

confidence in our ability to drive leverage, particularly in gross margin and G and A at the same time as we have historically invested in sales, marketing and R and D. And I think when you pull that forward to the initial 'twenty four guide on the backs of significant leverage we saw across adjusted EBITDA and free cash flow in 'twenty three, Setting out that initial guide, as you said, of north of 100 basis points of adjusted EBITDA leverage. And I think that It's certainly something that is reasonably close to what our target would be annually. I think we've had years where we started closer to 50 basis points of leverage and through over performance have Been able to take the guide up, but I think we feel good being able to start the year at that 20% revenue growth number, at the same time continue to make progress there on adjusted EBITDA.

Speaker 2

Great. Thank you.

Operator

Thank you. Please standby for our next question. Our next question comes from the line of Alex Zirkin with Wolfe Research. Your line is open.

Speaker 7

Hey guys, thanks for taking the question. I guess maybe wanted to ask one about the configuration of the guidance for next year. Is it Safe to say that we're still we're assuming kind of single digit, high single digit net client net adds For the year where the bulk of the growth is going

Speaker 8

to come

Speaker 7

from larger both larger lands and more expands. And then maybe just if you can double click on how much You expect growth for the year to come from the installed base selling compared to where maybe fiscal where you ended fiscal 2023? And then any comments on just the competitive environment, who you're taking care from increasingly, etcetera?

Speaker 2

Okay. So maybe start in reverse order. I wouldn't call it anything different from a competitive environment. It's always been very competitive. Kind of the usual suspects, and really our point of differentiation come down to the solutions and really Providing a very modern experience.

Speaker 2

So no change there. In fact, we feel good about our roadmap to be able to continue to compete From that perspective, I think in terms of some of the other points, Ryan or Toto, you want to handle one of the other Pieces?

Speaker 3

Yes, I don't think I mean I think to start, I mean I think in terms of your question in terms of what the mix is from a growth standpoint and Across sort of the target market, I mean, I think while it's been different every single year, I think we with what we're seeing right now, I don't think we have any different expectations for fiscal 2024 in terms of the mix of business relative to what we've seen kind of over the course of fiscal 2023. I think to Steve's point that the competitive environment tends it's always been competitive. I don't think we see any major shifts there. And I think our plan For 2024 contemplates largely what we've been seeing over the course of the last few quarters.

Speaker 2

Perfect. Thank you, guys.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Dan Jester with BMO Capital Markets. Your line is open.

Speaker 9

Great. Thanks for taking my question. I wanted to ask about the $500 PEPY. It seems like a really big Step up compared to last year. And so I'm just wondering, what's let you this year introduce so much new product?

Speaker 9

Is it You're just seeing better productivity out of R and D organization, that the types of products that you're launching are just maybe easier to get into the marketplace. Maybe just help me think about that big step up because it seems it's the biggest in several years.

Speaker 2

Yes, it's a good question. I think we've been pretty happy with our velocity in R and D overall. Sometimes these things do happen where you're doing a lot of work On the back end, some products can take you 9 or 12 months to build. You may have other products that are multi year efforts that you're kind of working on. The timing of launch can be very different.

Speaker 2

And so I think what you're seeing is the product of a couple of years of pretty strong work. And the other thing I would say to you is we've also focused on some platform capabilities that would allow us to go faster across R and D. And so I feel like the investments we've made over the last couple of years, you're starting to see now in terms of the new product launches. But I think it actually more importantly positions us to be able to High velocity on a go forward basis and that's pretty exciting for us.

Speaker 9

Great. Thank you. And then appreciate the new financial targets. Maybe Any updates on how you're thinking about capital allocation, inorganic growth going into the New Year? Thank you.

Speaker 3

Yes, I don't think there's any different contemplated from a capital allocation perspective. I think our view has consistently been that we want to use capital to be able to Growth, obviously, you're seeing the strength right now, as Steve was just talking through, and our ability to organically develop and deliver Product to continue to drive differentiation in the market, but I think I don't think there's any substantive change in our view on capital allocation as we think about fiscal 2024.

Speaker 9

Great. Thank you very much.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is open.

Speaker 10

Great. Thanks. Just 2 quick ones.

Speaker 11

When we think about OpEx and R and D Growth for the upcoming year, is the deceleration we're seeing just kind of about the return back to more normalized spending after the two Previous years and some pretty heavy investments?

Speaker 1

Yes. I mean, I think that's right. If you look at the spend levels That we had in fiscal 'twenty three, I think total R and D was up about 46% both in Q4 and in the full fiscal year. And I think what you'll see as we Head into a more normalized environment in fiscal 2024, you'll see R and D spend and sales and marketing as well kind of back to that historical cadence that attracts much closer to revenue growth.

Speaker 11

Great. And Ryan, when we think about the 2 to 3 points of headwind from the staffing levels likely being flat for the upcoming year, will that be pretty consistent each Quarter, imagine it would, but just want to check.

Speaker 1

Yes, nothing I'd call out from a seasonality standpoint. I think it's

Operator

Please stand by for our next question. Our next question comes from the line of Andrew Warren with D. A. Davidson and Company. Your line is open.

Speaker 12

Sorry, I think this is actually for me. This is Robert Simmons on for myself. So thanks for taking the question. You touched on the general topic, but more specifically, can you talk about how Blue Marble is performing In terms of helping you win new clients and for cross sell?

Speaker 2

Yes. So we've called out the success We've had upmarket, and that is where you run into more international opportunities. So customers might have employees in multiple countries. And so definitely Blue Marble has been a component of our product suite that has created some nice differentiation upmarket. So if you're a customer and you've got 1500 employees and you have 50 employees in 3 different countries.

Speaker 2

We've got a great solution for you. We can handle everything that you need. And that does become a differentiation In terms of us selling those customers. And so I think it's been a nice contributor up market. It continues to grow as well When you look at the standalone revenue that we bring in from those opportunities, but the biggest thing is really focused on, the differentiation upmarket.

Speaker 12

Got it. That makes sense. And then, great to see the revised long term targets. Do you have a timeframe for when you think you can achieve those and get into those ranges? And then also, how long do you think you can maintain 20% plus growth?

Speaker 11

Yes. I may hit

Speaker 1

the second part and Let Steve hit the last part of your question. I think, when you set the previous targets in August of 2018, I think we're 5 years later and we were Well under those ranges. So I think that's probably the right way to think about it. We don't have a specific year that we'd expect to hit those. But I think at the same time, Our expectation would be we'd continue to make progress beginning in 'twenty four and on an annual basis towards those revised targets.

Speaker 1

So Continue to have a high degree of confidence in being able to grow the business at a healthy rate and at the same time scale across the business as well.

Speaker 2

And in terms of continuing to grow at 20%, I think Toby mentioned earlier, we're definitely focused on growth as a big priority for us. And what's going to drive we're going to make the investments in product. We talked about how we're excited about what we've got coming out and have a rich product pipeline. That is one of the key elements That gives us some confidence on being able to focus on that. Bringing in the talent from a sales perspective, 18% headcount increase puts us in a really good position to be able to drive that.

Speaker 2

Huge TAM, right? We've got relatively low penetration in terms of the opportunity. So it really comes down for us to be able to kind of execute. Size of the opportunity is big enough. We've enough product differentiation, we've got a great pipeline.

Speaker 2

And so and I think as Toby mentioned, we have strategically made Some smaller acquisitions, that also have enhanced our capability. I just answered the question around Blue Marble. And so when you put all that together, I think that's what gives us Confidence in terms of being able to continue to grow at 20% plus. Great. Thanks.

Operator

Thank you. Please stand by for our next question. Our next question comes from the line of Siti Panagruha with Mizuho. Your line is open.

Speaker 10

Thank you. Thanks for taking my question. I wanted to ask about on demand pay. That's one something you announced long back And now most of the most of your competitors have that solution. How important is that for your customer.

Speaker 10

Like what sort of like we haven't heard from you any kind of traction there. Are you trying to revamp that product? Is it more to We help you win or is that really generating revenue? Any color on that?

Speaker 2

Yes. So we were one of the first to market with our on demand Pay products. So we've had that available several years. And I would say that the customers that really see value in that often have larger hourly Populations where they will actually request early access to their wages fairly frequently. And so that product worked really well for us.

Speaker 2

We've made based off customer feedback some enhancements to the product on an ongoing basis, the product is doing well. I think from the first day that we launched it, I never said this was going to be a big needle mover. I really characterize it as a nice feature that customers could take advantage of and I think that's kind of how it's played out for us overall. But I do think you need a product like that and customers are getting value from it, but it isn't a big driver for us.

Speaker 10

All right. And then I want to ask about the AI assets like you guys announced that in March. Any feedback From our early adopters, but broadly I want to ask, how do you think this HR and payroll industry will evolve as we start seeing this AI adoption And where do you see our opportunity to monetize for that?

Speaker 2

Sure. I think if you just take a step back and you think of some of the big challenges that HR teams have, You've got a very dynamic workforce, Gen Z entering the workforce, gig work increasing, globalization kind of On track and increasing as well. And so it's just a complicated environment for HR teams to really get the talent that they need in a fairly tight labor market. And so I think when you then overlay that with AI, AI creates opportunities for efficiency for HR teams. It creates opportunity to then use that time from efficiency to be able to drive a more engaging environment and actually really compete on a culture basis.

Speaker 2

And so we see our early clients doing that. So they're communicating more with their employees, they're driving engagement. We've got a Ton of use cases that we plan on rolling out over time that will make it so much easier for communication, engagement, Culture building initiatives, and I think that's going to be really important for our clients, as they attempt to win the war for talent. Thank you.

Operator

Thank you. At this time, I would now like to turn the call back over to Steve for closing remarks.

Speaker 2

Well, first of all, thank you to all of you for dialing in and having interest in Paylocity. And I just want to kind of restate my thank you for all of our Paylocity team members, 6 1,000 Strong that delivered a fantastic fiscal 'twenty three and looking forward to another great year in FY 'twenty four.

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Earnings Conference Call
Paylocity Q4 2023
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