Paylocity Holding Corp (PCTY) 2014 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paylocity's earnings results call for the third quarter of FY14 conference call.

(Operator Instructions)

As a reminder, this call is being recorded.

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

Good afternoon, and welcome to Paylocity's earnings call for the third quarter of 2014, which ended on March 31, 2014. 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 results announced in our press release issued after the market closed. The 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 prospectus and other Securities and Exchange Commission filings for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. There is 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.

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

Thank you, Peter.

I'd like to thank everyone for taking the time to join us for our first earnings call as a public Company. We're here to discuss the strong results from our fiscal third quarter which ended March 31. Peter will review our financial results in detail, but let me share a few highlights of front.

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

With $33.8 million in total revenue, we posted 41% growth versus the same quarter last year. Recurring revenue which represents 92% of our revenue grew 40% year-over-year. Our revenue retention rate continues to be in excess of 92% which is best in class for a Company targeting mid-sized firms.

Our third fiscal quarter is the largest quarter for our sales team with many clients preferring to switch solutions at the start of our calendar year. Our sales organization delivered robust revenue growth from new clients.

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

Since this is our first quarter as a public Company, I want to briefly review the market opportunity, our differentiated SaaS platform, and our go-to-market strategy. We deliver cloud-based payroll and human capital management software tailored specifically to the needs of medium-sized companies. We defined medium-sized companies as those with 20 to 1,000 employees.

We believe that we are in the early stages of a major market share shift from traditional payroll service providers to cloud-based SaaS solutions which leverage the payroll system to enable more comprehensive human capital management capabilities. There were 565,000 firms that fit the definition of mid-sized in the US in 2010, and we have less than 2% penetration into that target market.

We are a leading vendor of next-generation SaaS-based human capital management solutions targeted at mid-market, and we believe we are best positioned to capture this opportunity. The 40% plus growth we delivered in the third quarter was fueled by this shift in spending, as well as the strength of our platform and Company-wide execution.

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

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

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

We market and sell our products primarily through our direct sales force. We have a high velocity sales model with a 60-day sales cycle for a typical client, followed by a 3 to 6 week implementation process to get that new client started. With high-volume sales and an implementation model tailored to the needs of medium-sized businesses, managing our revenue growth risk is different than traditional enterprise software companies.

Our revenues are fairly linear over the course of the quarter, and we are not waiting to sign a few large deals at the end of the quarter to achieve our sales objective. We are very metrics driven and assess the productivity of our sales reps frequently. We know how business is converted over time, so tracking this information provides us with the comfort as to how our sales funnel is operating.

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

We have also leveraged two resellers to address specific territories, and as we noted in our S-1, we have the right to acquire them. The IPO triggered the right to acquire one reseller this fiscal year, and in fact, we are in the process of doing that now, and expect the acquisition to close by the end of May. While acquiring the resellers doesn't change our revenue outlook, it should improve our gross margins.

A key aspect of Paylocity's differentiation in the market is the continuous product innovation we bring to our customers. During the quarter, we brought new functionality to the market in the form of Paylocity Impressions in mobile, mobile punching with GPS, and healthcare reform analytics. With Paylocity Impressions in mobile, we have extended our social collaboration capability for peer-to-peer recognition from the desktop into mobile device.

Not only do employees have the ability to recognize one another with a customized badge, but managers can then approve the recognition all through a mobile device. Peer-to-peer, real time recognition as is critical social component for any organization, and Impressions mobile now delivers it in a more powerful and accessible way as a result of this series of enhancements.

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

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

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

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

With that, let me turn it over to Peter.

Thanks, Steve.

Before reviewing our financial results in detail, it's worth covering the key aspects of our financial model as this is our first call as a publicly traded Company. Our recurring revenues have historically represented 94% or more of our overall revenues, and is comprised of two components.

First, we have recurring fees attributable to our cloud-based payroll and HCM software solutions, which make up greater than 92% of our overall revenues annually. These recurring fees generally include per client base fees, in addition to a fee based on the number of client employees and the number of products a client uses. In our third fiscal quarter, we also charge fees attributable to our preparation of the W-2 documents and annual required tax filings on behalf of our client.

Second, we also earn interest income on funds held for clients. We collect funds for employee payroll payments and related taxes in advance of remittance to employees and taxing authorities. Prior to remittance, we earn interest on these funds through financial institutions with which we have automated clearinghouse arrangements. Given the current interest rate environment, we did not derive a material amount of recurring revenue from this source, 1% to 2% of overall revenue, but we would obviously benefit from an increase in interest rates.

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

Our agreements with clients do not have a specified term and are generally cancelable by the client on 60 days or less notice. Even without fixed term agreements our annual revenue retention rate has been consistently greater than 92% for several years, which, as Steve noted, is best in class for a Company targeting firms with 20 to 1,000 employees. This combination of high recurring revenue percentages and high retention rates provide significant visibility into our future operating results.

As Steve noted, given the fact that the addressable market and our low penetration levels, we are almost entirely focused on the land part of our strategy, generating revenue from new clients. Therefore, to give you the best sense of our momentum in this regard, we intend to provide a quarterly look at recurring fees from new versus existing clients.

We also plan on updating you quarterly with regards to our revenue retention performance. Like our revenues, we separate our cost of revenues in two different categories, recurring revenue and implementation services and other. These two numbers are combined to form our overall costs, and then to produce our overall gross profit margins.

We refine our gross margins further by providing adjusted numbers. We adjust for two items. First, we exclude stock-based compensation, and second, we exclude amortization expense associated with capitalized research and development costs. We believe these adjusted numbers provide the best and most reliable comparison to other SaaS companies. We view our adjusted recurring revenue margins as the best barometer for our overall long-term margin opportunity as we generate these margins on the vast majority of our revenues.

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

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

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

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

Our total recurring revenue of $31.2 million was up 40% year-over-year and represented 92% of our total revenue in the quarter. Implementation services and other revenue was $2.6 million, which was up 47% from the year-ago level. In terms of supplemental revenue metrics, recurring fees from new clients represented 41% of total recurring fees on a fiscal year-to-date basis, which was the same as the last fiscal year, and indicates our continued focus on the land part of our strategy. In addition, revenue retention, always calculated on a trailing 12-month basis, was greater than 92% for the period, which is directly in line with our historical performance and is, we believe, best in class for segment.

Moving down the P&L, I'll be talking about gross profit on an adjusted basis, which in addition to excluding stock-based compensation, also excludes amortization of capitalized software. A reconciliation of GAAP to non-GAAP is provided in the press release we issued after the close today.

Adjusted gross profits in the third quarter was $19.6 million, representing a gross margin of 58%, as compared to $14 million or 58% in the third quarter of 2013. Further, our adjusted gross profit on recurring revenues was $21.7 million, or 69% in the third quarter, up from $15.1 million or 68% in the year prior.

Now turning to operating expenses, I will also discuss them on a non-GAAP basis excluding stock-based compensation. We have invested and intend to continue to invest in growing our research and development activities to improve and expand our product offerings. It is essential that we not only maintained but expand what we believe is our technological leadership in our segment.

In order to understand our overall investment in research and development, it is important to combine both what we expense and what we capitalize. On a combined basis, research and development costs were $3.4 million in the third quarter, a 45% increase from the prior year. Further, for the 9 months ended March 31, 2014, we've increased our research and development expenses to $9.6 million, a 59% increase over the prior year. Sales and marketing expense increased to $8.5 million in the third quarter, a 44% increase from the prior year.

As we aggressively pursue the land phase of our strategy, we continue to grow our sales force and expand our marketing activities. General and administrative costs were $4.7 million as compared to $2.8 million in the prior year. The increase is largely the result of public Company costs. Our adjusted EBITDA which is adjusted only for stock-based compensation was $5.2 million for the quarter versus $4.2 million for the year prior. Our increase in sales was partially offset by increases in operating expenses.

Since we went public so late in the third quarter, we would expect that our operating expenses as a percentage of sales will continue to increase in the near-term as we invest in research and development, expand our sales force and marketing activities, and operate as a public Company. Again, our adjusted EBITDA results in the third quarter are positively affected by our recurring annual billings that occurred during this quarter. Over time, we believe that our investments and strategies will enable us to create substantial long term shareholder value.

On a pro forma basis, non-GAAP net income per share was $0.04 based on 44.9 million diluted weighted shares outstanding. This compares to per share income of $0.05 based on 44.4 million diluted weighted shares outstanding for the same period of last year.

Briefly covering our GAAP results, gross profit was $18.8 million. Operating income was $2.1 million, and net income was $1.2 million.

In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $89 million, driven largely by net IPO proceeds of $82 million. From a cash flow perspective, we generated $8.1 million in cash from operating activities in the 9 months ended March 31, 2014, and spent $7.9 million on property, plant, and equipment, and capitalized software. We also paid down our remaining outstanding indebtedness of $1.6 million.

Finally, I'd like to provide our financial guidance for the fourth quarter and full year of fy14. Fourth quarter FY14, total revenue for the Company's fourth quarter of FY14 is projected to be in the range of $26 million to $27 million, an increase of approximately 28% to 33% year-over-year. Adjusted EBITDA is expected to be a loss in the range of negative $1.3 million to negative $2.3 million. Non-GAAP net loss is expected to be in the range of negative $1.8 million to negative $2.8 million, or negative $0.04 to negative $0.06 per share, based on 49.6 million basic weighted average common shares outstanding. This guidance assumes an income tax benefit of approximately $1.2 million.

FY14 guidance, revenue for the Company's full-year 2014 is projected to be the range of $106 million to $107 million, an increase of approximately 37% to 38% year-over-year. Adjusted EBITDA is expected to be the range of $3.4 million to $4.4 million. On a pro forma basis, to reflect the conversion of all outstanding preferred shares as of July 1, 2013, non-GAAP net loss is expected to be the range of negative $1.2 million to negative $2.2 million, or negative $0.03 to negative $0.05 per share based on 45.4 million basic weighted average common shares outstanding.

This guidance assumes an income tax benefit of approximately $0.8 million, and assumes no valuation allowance in the fourth quarter. We provide tax benefit information as we assess the need for a valuation allowance at the end of every reporting period. We have not recorded a valuation allowance in the past but this does not mean we will not require one in the future.

Lastly, I do want to point out a quarter 3 subsequent event. Our principal stockholder and founder, Steve Sarowitz, is contributing $1.1 million to the Company for the express purpose of paying a cash bonus to long-term employees in recognition of their past service. The Company intends to record a capital contribution to additional paid in capital for the amount received from Mr. Sarowitz, and compensation expense for the amount paid to employees in the three-month period ended June 30, 2014, accordingly. It is a tremendous gesture by our founder, who remains a great proponent and contributor to our success. In summary, we are pleased with our operational performance during the third fiscal quarter of 2014.

We're now ready to begin the Q&A session.

(Operator instructions)

Justin Furby, William Blair & Company.

Hey, guys. Congrats. Welcome to the joys of the public market. Steve, I guess to start off, big picture, where you think ADP and Paychex are five years from now? Are they still growing? Obviously, they're not going away, but which of these two do you think is better positioned to push back against [firms] like you guys, like (inaudible) and some of the others out there?

Sure, that's a good question. Obviously, we get the majority of our business from those large payroll providers, ADP and Paychex. I think you've got to go back to what's happening in the marketplace. There's definitely a shift in SaaS. I think as I said in my opening remarks, we used to really have to introduce the SaaS concept back five years ago. It's becoming clear that customers are not only looking for SaaS, but they're really looking for a unified experience.

We would anticipate that ADP or Paychex will continue to invest in their products and solutions, and they certainly do understand this trend. I think also you can look at them historically and look at relatively low unit growth and really pushing additional products back to the customers.

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

Okay. There's been quite a bit a discussion around [Ulti] and potential partnerships with Paychex. Can you offer a couple of scenarios where A, they get a deal done with the Paychex, and the other scenario where they build out their own sales team around that? I guess I'm just curious how you think that would play out, each of those two scenarios over the next couple of years, as it relates to you guys.

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

From our perspective, Ultimate Software's a great company, and they've had great success. Obviously, there's very little overlap in our current market focus with them today. Paychex, there would certainly be much more overlap, but we believe all three of those things would have to be replicated to really gain significant market share, and we think we've got that advantage.

Frankly, the same holds true for scenario B. If Ultimate were to expand in that space, they've got a very robust platform, clearly a SaaS platform, and they've have great success. We have great respect for them as a company. We just think we have a different model in terms of go-to-market strategy, our delivery model in terms of service and implementation.

Lastly, our product is really tailored to the medium-sized organization. We think we're in a position to be successful. If they choose scenario A and B, and it's very large market opportunity, so we can frankly both have a level of success.

Okay. Then I think you're entering a quarter where you starting to staff up for next fiscal year on the sales side. Can you give us a feel for how you're thinking about [representation] similar to gross rates as last year? What's your approach as you move into fiscal 2015?

As you heard Peter say in the opening remarks, we're definitely squarely focused on the land part of our strategy, and we think we have a big opportunity in front of us, and our revenue growth is our primary focus. You're correct; we do start staffing in the last quarter towards our sales target for prior years, and we plan on providing you the number of quota carrying reps annually.

Obviously, just giving you an update in terms of tracking towards that goal, I would tell you that we are in a good position towards the target. I look at it from a year-over-year basis, and we're roughly where we were last year and the year prior in terms of the number of people that we want, relative to our goal by the end of the fiscal year.

Okay, great. Thanks very much.

Terry Tillman, Raymond James.

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

Sure, that's a great question. I think the key areas of investment from the IPO from our perspective is, one, in the technology and R&D. Peter gave you some of the numbers in terms of the investments there. The second area is really sales and marketing overall, and part of that is definitely the broker channel.

I would tell you that we have done very little marketing historically. Spend on marketing can take longer time to get the return on that, but we see great opportunities to increase our levels of marketing towards that broker channel. We're doing several things in that regard as we speak, so that certainly is a contributor of the year-over-year increase in terms of sales and marketing.

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

(technical difficulties)

Sorry, Terry. I missed that. You just broke up.

Sorry. The new solutions, the benefit analytics solution, to help with ACA compliance (inaudible) at some point there might be some other additional functionality, whether it's on-boarding or some of the other capabilities. Maybe specifically with benefits, what kind of [capital] increase or lift can you see from that product? Should we think about that is being additive this year, or is it just like a 1.0 situation where it's going to take some time to get a good ramp and adoption?

That's a good question. We've actually gotten great reception the marketplace from both our customers and brokers. I would certainly call it as the 1.0 release for us in that category, and we don't view this is a revenue lift per se. We view this as an opportunity to continue to expand the channel. It's not something that we're charging our customers for. We give them the analytics tool included in their package with us.

Then brokers also have access to it. From our perspective, the investment in the analytics tool really allows us to continue to grow that broker channel. I wouldn't look at it from a revenue lift perspective, but more from a broker penetration over time.

Just my final one, relates to I think historically, you've had about 100 plus employees per average customer. Anything different in terms of average size of new business being [one] in the quarter? Thank you.

Yes, we are very much focused on the medium-sized organization, 20 to 1,000. Our roughly the average size varies around that 100 mark. It's moved around a little bit over time but not much frankly. It's very consistent. We did not see anything different in the quarter that will move the needle on average size customers outside of that zone.

Nandan Amladi, Deutsche Bank.

Hello, good afternoon. Thanks for taking my question. Steve, first question is how has going public in this past quarter changed your profile in the market, both from a competitive perspective, how customers perceive you, and looking out to next year how sales people perceive you?

Thanks, Nandan. That's a good question. I would say from a customer perspective, one of the things that we always thought in the marketplace is we didn't have a whole lot of brand awareness. When we got into the sales process, we would certainly hear the objection, who was Paylocity? I'm not familiar with your story.

Some of our large public providers would try to spread fear and uncertainty potentially about us. That has become dramatically easier to handle that objection. That has been very helpful, from a customer perspective in the sales process.

Then from I think the second part of it is from an employee perspective, I think you mentioned salespeople generally speaking, that was certainly one of the key reasons to go public, was having the ability to provide the right level of incentives, and frankly, the right level of investments overall into the Company. I think you will see us continue to take advantage of that by investing further in sales and marketing, and R&D than we have historically.

Thanks. To follow up again, this partly was addressed earlier but a little different slant on the question. As we look at sales expansion next year, you also have the two reseller arrangements that you disclosed on the S-1. How do you balance that in relation to just your normal cadence of sales capacity expansion for next year?

Our two reseller relationships are assigned to very specific geographies, and I disclosed in the opening remarks, we're in the process of acquiring one of those resellers now. We expect that to close by the end of May. We will then obviously start staffing up in those territories with our own sales headcount, but we've already incorporated that into our total headcount goals for the year. We're certainly actively looking at that.

We need to complete that acquisition to really start the transition, but our plan certainly will be to take that territory over and treat it just like any other major market across the country. The second reseller, we don't have the opportunity to acquire until sometime next fiscal year. That isn't something that we're overly concerned with at the moment.

Thank you.

Pat Walravens, JMP Group.

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

Sure, Pat. I think our philosophy, if you look at our history, it's been our prior two fiscal years was 40% roughly on a growth rate, this year through the first three quarters, similar growth rate as we just talked about. However, I would tell you that most important to us is the quality delivery of implementation services, of ongoing services, and then clearly of our products that we're delivering to our customers. The implementation process is one that has to go right. Payroll has to be accurate every single time.

We would tell you that quality is really the governor on growth, with less than 2% penetration into the total market opportunity. As you indicate, we could invest more and try to grow faster, but we're not willing to do that if that is to compromise quality. We think that we've been able to balance that at our historical growth rates in terms of quality. That's really how we think about that, is number one, at what level of growth can we deliver the right quality to our customers.

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

Okay, sure. More than 50% of our new business comes from the traditional payroll outsourcers. Obviously, ADP and Paychex would be the two most common providers in that space.

The number one reason that we win is really the SaaS technology that we have organically built, and that is designed for the needs of the medium-sized organization. It really starts with the fact that everybody has to have payroll. We've taken that concept and expanded that into other modules: time and labor; talent management; human resources; and benefits.

And it's so much easier to get it from a unified platform than to buy these things individually, or to use systems that have been acquired and stitched together. The product is really the number one reason that we win, and then we back that up with great service, which drives our 92% plus retention.

Great. Then last one for me. When you acquire the reseller, and then in the future if you acquire another one, will there be any impact on your guidance from that?

This is Peter McGrail. Yes, on our quarterly report it will show how much revenue has shown, and how much revenue we get from these resellers, and how much we pay them. You'll get from there what majority of that we'll get as a gross margin lift as we move forward. As we fold them in, we will build that into our gross margin lift into our guidance.

Pat, we obviously are in the process of acquiring this reseller in the current quarter, very little impact in the current quarter. We've obviously included that in the guidance. When we give full-year guidance next year, we'll have completed the one reseller. We will absolutely include that in the guidance. There is some timing delta differences on the second reseller, but we obviously would anticipate including what we know at that time.

Yes, as that happens we will include it in our guidance.

Right, going forward.

All right. Thank you.

[Cash Begdan], Merrill Lynch.

Hi. Thank you very much for taking my question. Steve, can you talk to us a little bit about the average revenue? If not in specificity, directionally, how's the average revenue per client trending, in particular average contract size for new clients trending? Where are you seeing the increased incremental uptake of some of the non-core new modules in your business? Thank you.

Thanks, Cash. First and foremost, it's probably important to understand how we manage our sales team and how we incent our sales team. We really and incent our sales team in terms of providing new revenue to us. That's why we also provide you with that new revenue metric versus existing customers.

We're not as focused in terms of whether that's coming from client growth or whether those new customers to us are taking on more products. What you'll see is on an annual basis we'll give you be those counts. You'll then obviously be able to calculate that average revenue per customer as well as the client growth. It's the new revenue that's number one, our focus.

I think just to give you some level of guidance, we have not shifted from a land to an expand strategy. Most of our revenue is being driven by new customers being added to the platform, and we continue to see those new customers uptake more products in all those categories, HR, time and labor, as well as benefits, and talent management, still being a little bit new to us. We are seeing more uptake, but it's just a smaller portion overall. That's what we're seeing in the market.

Great. Also any commentary on the average contract size, the growth rate of that average contract size? How that is trending relative to the past few quarters? That'll also be useful. Thank you very much.

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

Great. Thank you very much.

Thank you. Michael [Turn], Needham & Company.

Hello, guys. Congrats on a great quarter. Thanks for taking my questions. I wondering if you could talk a little bit about the kinds of assumptions you might be making around the lead generation benefits that come from being a public Company, and wondering if you're seeing any benefits there thus far?

It's certainly pretty early for us to make that assessment. We obviously are seeing benefits as I mentioned earlier in the sales process. We're seeing benefits with our employees and recruiting in our general brand recognition in the marketplace.

We're also making additional investments in marketing, above and beyond what we've done before to try and take advantage of that opportunity, particularly in areas like the broker channel. I would tell you that early reception has been positive, but impossible at this point for us to measure that.

Sure. Great, thanks. Then with respect assumptions around headcount growth at existing customers, it seems like the employment environment is on a bit of a path to recovery. I'm wondering if you're seeing any impacts there at all?

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

Great, thanks. That's helpful. Thanks for taking my questions.

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

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

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