Paylocity Holding Corp (PCTY) 2014 Q4 法說會逐字稿

Good day ladies and gentlemen and welcome to the Paylocity Holding Corporation fourth-quarter and FY14 results.

(Operator Instructions)

As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Peter McGrail, Chief Financial Officer.

Good afternoon and welcome to Paylocity's earnings results call for the fourth quarter of 2014, which ended on June 30, 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 the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.

Before beginning, we must caution you that today's remarks in this discussion including statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties which could cause actual results to differ from the results implied by these or other forward-looking statements.

Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements.

Also during the course of today's call, we will refer to certain non-GAAP financial measures. 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, and thanks to all of you for joining us today. Peter will review our financial results and 2015 guidance in detail, but let me share a few of the highlights from fourth quarter and FY14.

We finished the year with strong performance across all of our key metrics as demand for our cloud-based unified payroll and human capital management solutions continues to grow. Total revenue was up 41% for both the quarter and the fiscal year. Recurring fees grew even faster at 42% for the quarter and 41% for the year.

We completed the acquisition of one of our resellers in May which yielded a lift in Q4 gross margin. Adjusted recurring gross margin was 67% for the quarter and 66% for the year.

Recurring revenue was 95% of total revenue in the quarter and 94% for the year. Revenue retention continues to exceed 92%, which is best in class for a company targeting midsized firms.

Our client count at year-end was 8500, up 24% year-over-year. We have achieved 25% compounded annual growth in client count over the last four years.

Adjusted EBITDA was just slightly negative for the quarter as we ramped up our spending on sales and marketing and research and development as well as the addition of certain public company expenses. Adjusted EBITDA, however, was $5.4 million for the fiscal year.

A highlight of the year was our March IPO, which strengthened our balance sheet raising net proceeds of over $82 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.

Let me take a moment to review our strategic opportunity. We deliver cloud-based payroll and human capital management software tailored specifically to the needs of medium-sized companies. We define midsize companies as those with 20 to 1000 employees.

We believe we are in the early stages of a major market shift from traditional payroll service providers to a cloud-based SaaS model which leverages the payroll system to enable a more comprehensive human capital management capability. There were 565,000 firms that fit the definition of midsized in the US in 2010, and we still have less than 2% penetration into that target market. The 40% plus growth we delivered in FY14 was fueled by a combination of strong execution, industry-leading products and a very healthy demand environment for next-generation human capital management solutions.

We remain very much in the land phase of our land and expand strategy with more than 44% of our revenue coming from new customers for FY14 consistent with FY13. We ended the year with 8500 customers, up 24% from the 6850 we had at the end of FY13.

We also increased our average revenue from client this past fiscal year by 13% to nearly $12,000 primarily by selling more modules to new clients. While we're quick to respond to client need, we've not yet developed a targeted strategy to sell back into the client base as we want our implementation resources squarely focused on delivering the highest quality experience for our new clients. As a note, we calculate average revenue per client based off total recurring revenue for the fiscal year divided by the ending annual client base.

We intend to continue to invest to take advantage of the momentum we are seeing in the market we have increased our spend in both sales and marketing and research and development. We have invested in a number of new marketing initiatives to expand our brand, such as first-time attendance at the national trade shows for both the American Payroll Association and the Society of Human Resource Management.

We have also expanded our upcoming client conference to two full days on October 16 and 17. We've historically drawn the large majority of our attendees from the Chicagoland area, but based on feedback from our clients we've enhance the conference agenda in an effort to attract additional clients from different geographies.

From a marketing perspective we're also making incremental investments in the broker channel with webinars, newsletters, golf sponsorship and broker events targeting this important channel that once again yielded greater than 25% of our new business revenue in FY14. This past fiscal year, we receive referrals from more than 1000 individual brokers across the country, up from over 700 in FY13. This unique referral network of 401(k) advisors, insurance brokers, third-party administrators and HR consultants provide our sales force highly qualified leads that have the highest close ratio across any of our channels.

A key reason for our success in this channel is our ability to automate data integration by connecting the client's payroll information to product providers in the 401(k) and insurance industries. Our direct sales force is a highly effective group of very experienced software sales representatives with extensive payroll and human capital domain expertise.

As we enter the fiscal year, we have set our targeted number of quota carrying reps at 126, up from 95 in FY14. This represents a 33% increase from the prior year, very consistent with the increase we made from FY13 to 2014 where we grew quota carriers by 34%.

I am pleased to report that we're fully staffed and had all of our new team members attend our annual sales kickoff meeting in late July. I spent the week with our sales team here in Chicago where they share best practices, rolled out new training and celebrated the best year in our sales history. Our sales team is highly energized and definitely very excited about opportunities this fiscal year and beyond.

I would now like to spend a few moments discussing our product strategy. We invested 14.7% in R&D for the quarter and 12.6% for the fiscal year when you combined R&D expense and capitalized software.

Our modern cloud architecture enables us to add features and modules quickly and seamlessly as we release new versions of our software every quarter. We continue to ramp our investment in R&D as we remain focused on delivering new products and features to the market in a timely fashion, further cementing our product leadership position.

We have recently launched a new onboarding module that allows clients to automate the process of hiring employees. This module is available for additional monthly fee and allows new hires to follow a customized step-by-step hiring process to complete new hire forms on their phone, tablet or desktop. This product was introduced at the National Society of Human Resource Management show in June, and early feedback from clients indicate they really appreciate the ease of use of our new adaptive design and the flexibility to automate what has traditionally been a very manual process for our clients.

We have also recently launched Web Benefits at our annual sales kickoff and expect to have our first clients completing their annual enrollment this fall. Web Benefits is a proprietary benefits enrollment solution specifically built for the small and midsize organizations that wish to move away from manual enrollment process to an automated online experience. This solution provides an alternative to Paylocity's enterprise benefit solution powered by Bswift which targets clients with more than 300 employees.

In summary, we are very pleased with the fourth-quarter and full-year results. Before I pass the call over to Peter to review the financial details and targets for 2015, I would like to give particular thanks to our employees for their commitment to Paylocity.

I could not be prouder to have been recently recognized as of one of Chicago's 101 best and brightest companies to work for based on feedback from our employees in the Chicagoland area. With that, let me turn it over to Peter.

Thanks, Steve. Let me walk through the results and provide a bit of color as well as review some of the key aspects of our financial model.

Revenue. Total revenue for the quarter was $28.6 million, which represents a robust 41% increase from the same period in the prior year. Total revenue for the year was $108.7 million and as with the quarter was up 41% from the prior year.

As you may recall, our revenues have two major components: recurring and nonrecurring. Our recurring revenue has historically represented about 94% of our overall revenues and is separated into two categories.

First, we have recurring fees attributable to our cloud-based payroll and HCM software solution. Second, we earn interest income on funds held for clients.

We collect funds for employee payroll payments and related taxes in advance of remittance to employees in the taxing authorities. Given the current interest rate environment, we do not derive a material amount of recurring revenue from the source, 1% to 2% of overall revenue, but we obviously would benefit from an increase in interest rates.

For the fourth quarter, our total recurring revenue of $27.1 million was up 41% from the prior year and represented 95% of our total revenue in the quarter. Recurring fees were up 42% while interest income actually declined 7% with declining rates offsetting balance increases.

For the year, our total recurring revenue of $101.9 million was up over 40% and represented 94% of our total revenue for the year. Our nonrecurring 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.

We charge for these services when our implementations are complete and do not defer revenue. These fees typically represent 5% to 6% of our overall revenue on an annual basis.

Implementation services and other revenue was $1.5 million for the fourth quarter and $6.7 million for the year, up 48% and 49% respectively from a year ago. Our agreements with clients do not have a specified term and are generally cancelable by the client on 60 days notice or less. Even without fixed term agreements, our annual revenue retention rate which is always calculated on a trailing 12 month basis has been consistently greater than 92% for several years and remains so this year.

As we've noted in the past, we believe this is best-in-class in our segment. This combination of high recurring revenue percentages and high retention rates provide significant visibility into our future operating results.

Gross margins. Like our revenues, we separate our cost of revenues into two different categories: recurring revenue and implementation services and other. These two numbers are combined to form our overall cost and then to produce our overall gross profit margins.

We refine our gross margins further by providing adjusted numbers. We adjust for three items.

First, we exclude stock-based compensation. Second, we exclude the one-time cash bonus payout for long-term employees in recognition of their past service which was generously contributed by our founder Steve Sarowitz in the fourth quarter of 2014. And third, we exclude amortization expense associated with capitalized research and development costs.

A reconciliation of GAAP to non-GAAP adjusted gross margin is provided in the press release we issued after the close today. We believe these adjusted numbers provide the best and most reliable comparison to other software as a service companies.

Adjusted gross profit in the fourth quarter was $15 million, representing a gross margin of 52% as compared to $10.1 million or 50% in the fourth quarter of 2013. This improvement was primarily the result of the acquisition of one of our two resellers in May which Steve highlighted in his comments. Adjusted gross profit for the full fiscal year was $57 million, representing a gross margin of 53% as compared to $40.7 million or 53% for the prior year.

We view our adjusted recurring revenue gross margins as the best barometer for overall long-term margin opportunity as we generate these margins on the vast majority of our revenues. Our adjusted gross profit on recurring revenues was $18 million or 67% in the fourth quarter, up from $12.3 million or 64% in the year prior. Again, this improvement was primarily the result of the acquisition of one of our two resellers.

Adjusted gross profit on recurring revenues was $67.5 million or 66% for FY14, up from $47 million or 65% in the prior year. As we discussed in the past, our adjusted gross margins on nonrecurring revenue specifically on implementation services are negative.

We view the negative margins on our implementation services as a great short-term investment. They only last 3 to 6 weeks, which them become a long-term high-margin annuity. In regards to implementation, we charge what we believe are market rates and will continue this practice as we continue to gain market share.

Operating expenses. Given that we are less than 2% penetrated into this tremendous opportunity, we are as Steve noted incrementally increasing our investments in two key areas. First, we are focusing investment in research and development to maintain and extend our technological leadership.

Second, we are engaging in sales and marketing activities that have the potential for long-term impacts. Including taking a higher profile industry events and cultivating our relationships with our unique broker referral channel, both of which we did in the fourth quarter.

In order to understand our overall investment in research and development, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, research and development investments were $4.2 million or 14.7% of revenue in the fourth quarter and $13.7 million or 12.6% of revenue for the full year.

On a non-GAAP basis, sales and marketing expense increased to $8.2 million or 28.7% of revenue in the fourth quarter and $27.3 million or 25.2% of revenue for the full year. On a non-GAAP basis, general and administrative costs were $5.7 million or 19.9% of revenue in the fourth quarter, including some one-time public cost and $19.2 million or 17.7% of revenue for the full year.

Income loss. Our adjusted EBITDA, which is adjusted for stock-based compensation, a one-time founder funded bonus payout and the amortization of intangibles related to our reseller acquisition was negative $0.3 million for the quarter versus $0.7 million for the year ago quarter. Our adjusted EBITDA for the year was $5.4 million versus $6.3 million for the year prior.

For the quarter, non-GAAP net loss was negative $2.4 million which included $0.5 million of the income tax expense resulting from a one-time non-cash charge to establish a valuation allowance against deferred tax assets. Excluding tax impacts, non-GAAP net loss outperformed guidance by $1.1 million.

Non-GAAP net loss per share including the non-cash tax expense was negative $0.05 for the three months ended June 30, 2014 based on 49.6 million diluted weighted average common shares outstanding. The tax differential negatively impacted non-GAAP net loss per share by negative $0.03.

For the year non-GAAP net loss was negative $1.1 million, which included $0.3 million of income tax expense resulting from a one-time non-cash charge to establish a valuation allowance against deferred tax asset. Exciting tax impact, non-GAAP net loss outperformed guidance by $1.2 million.

On a pro forma basis assuming conversion of all outstanding preferred shares as of July 1, 2013, non-GAAP net loss per share was negative $0.02 for FY14 based on 45.4 million diluted weighted average common shares outstanding. Tax differential negatively impacted non-GAAP net loss per share by negative $0.01.

Briefly covering our GAAP results. For the quarter, gross profit was $13.5 million, operating loss was negative $6.3 million, and net loss was negative $6.7 million. And on a full-year basis gross profit was $53.6 million, operating loss was negative $7 million and net loss was negative $7.1 million.

Cash. 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. In regard to the balance sheet, we ended the year with cash and cash equivalents of $78.8 million. From a cash flow perspective we generated $7.2 million in cash from operating activities in the year ended June 30, 2014 and spent $6.7 million on property plant and equipment.

Finally, I would like to provide our financial guidance for the first quarter and full year of FY14. For the first quarter of 2015, total revenue is expected to be in the range of $29 million to $30 million, adjusted EBITDA is expected to be a loss in the range of negative $2.5 million to negative $1.5 million, non-GAAP net loss is expected to be in the range of negative $5 million to negative $4 million or negative $0.10 to negative $0.08 per share based on 49.6 million basic weighted average common shares outstanding. As a result of the tax valuation allowance, this guidance assumes no income tax expense or benefit.

For the full FY15, keep in mind the W-2 and other year-end tax volumes make our third fiscal quarter significantly higher in revenue, adjusted EBITDA and non-GAAP net income than our other quarters. For the full-year, total revenue is expected to be in the range of $139 million to $143 million, adjusted EBITDA is expected to be in the range of $1 million to $3 million, non-GAAP net loss is expected to be in the range of negative $8 million to negative $6 million or negative $0.16 to negative $0.12 per share based on 49.6 million basic weighted average common shares outstanding. As a result of the tax valuation allowance, this guidance assumes no income tax expense or benefit.

In summary, we're very pleased with our operational performance during the fourth quarter and full FY14. Operator, we are now ready to begin the Q&A session.

Thank you.

(Operator Instructions)

Justin Furby, William Blair & Company

Great, thanks guys and congrats. Steve, to start can you give us a sense in Q4 the average pricing you saw on new deals.

Just what that look like in terms of per employee per month and what that looked like a year ago. And as you look out a over the next three to five years where you think that's heading over the medium-term?

Well first I would point you to the fact that over the last several years you see we've had a fairly consistent growth rate and fairly consistent unit growth rate over that time period. So the balance of that is really coming from new customers buying more of our modules.

We saw the average revenue per customer increase by 13% this past fiscal year. And I wouldn't give you any color that that was different in the fourth quarter versus the rest of the year.

It was really gradually throughout the year we see ourselves getting a little bit more attach rates to those new customers and then selling them more. So nothing happened in the fourth quarter to create those dynamics. That was something that happened over the entire fiscal year.

Okay, and if you think about the guidance, the revenue guidance for FY15, are you assuming similar dynamics where you have a 20% to 25% unit growth and the balance is price? Or is there something different that you are thinking about?

We task our sales force with bringing new business revenue in. That is the way our sales quota works.

From my perspective, the market somewhat dictates whether it's going to be more unit growth or more average revenue per customer combined with obviously our products that we have available to them. So I'm not that worried if it's a little bit different. I think in order of magnitude that makes sense.

It wouldn't surprise me if it's a little bit different. It's really just going to be a reaction to the marketplace.

The customers want more from us in the sales force are focusing on that, or are going to end up with a little more or little less unit growth? But I think in orders of magnitude that's what we expect, but don't be surprised if there's some difference around that.

And the new products, the onboarding, the benefits, as it relates to FY15 is there much impact whatsoever in the model or how do you expect that to play out?

So first let's talk about onboarding. So we're very excited about the onboarding offering.

We released that at the SHRM show which I said in my opening remarks. And we're seeing really great early feedback, and it really automates a fairly manual process of bringing on new hires, getting them involved, welcoming them to the company.

So we're seeing good early traction with that module. That is an additional per employee per month. We just started actively selling that.

That was trained at our annual sales kick off, so we should start to see a little bit of revenue leak it to FY15. But I don't seeing that a big contributors simply because as customers come on we only get part of the annual revenue for that year. So it's certainly helpful to us.

This fiscal year I think Web Benefits is probably another fiscal year away to being at all material. We will have our first client doing online enrollment this fall.

We don't have current clients on that as of yet. We are selling that into the marketplace for customers that are in our really target market, so think of 100 to 200 employees.

And we anticipate that some of those customers will come online we will continue to add every quarter to that product, get that better throughout the year. And we think it's going to be a great revenue contributor to the following fiscal year.

Okay and in terms of the earnings guidance for this fiscal year, just love to hear your thoughts on how you're approaching that. I guess if a year from now you end up outperforming revenue expectations, is it likely that you also outperform on earnings or are you likely to reinvest those incremental dollars back into other areas?

Yes, so I think we highlighted a couple of the areas where we have made some incremental investments already. And those would certainly be the area that we would evaluate if we have overperformance.

So we look at research and development, we've got a very broad road map from a product development perspective that we think we can execute against. If we do get overperformance, we certainly look at the opportunity to continue to add to that team. We've gotten great performance from them.

And then secondly we're in the very early innings of a very large market opportunity. So from a sales and marketing perspective, we always look for opportunities where we can get a return on those.

I would characterize both of those things as incremental opportunities and not big differences in terms of our history. But to answer your question we would evaluate if we have overperformance whether we have those opportunities to invest because ultimately we're really trying to capitalize on a huge opportunity in front of us. And that's really the way that we think about it.

Okay great, and last one if I may on the gross margin for FY15, any reason why you get a full-year of that reseller buyout in the numbers, any reason why they wouldn't pick up another 100 to 200 basis points on FY15 on the recurring site?

There's no reason they would not. That blip you saw in the fourth quarter will carry into the new year.

Great. Thanks guys.

Thank you.

Terry Tillman, Raymond James.

Hi gentlemen, good afternoon. Thanks for taking my questions, and I would also echo congrats.

Steve, can I start with you in terms of the benefits side? It's highly dynamic right now in terms of ACA requirements, healthcare reform, et cetera. I know this benefit solution is still brand-new and you don't have customers up on it yet, but I'm curious about your referral network.

Is this a potential calling card or incremental calling card for them to call on these CFOs or key level executives of these midsized firms that can help accelerate some your lead generation? Or introducing the benefit solution, does that actually create channel conflict because maybe they are selling those solutions?

Let me take a step back and talk about some of the things going on in the benefit space. And one thing you didn't mention but I'd like to start with that is certainly some of the legislated changes around healthcare reform.

And I think we talked about this on the last call, we introduced module in our application that really allows clients to forecast to healthcare reform impact. And we're going to continue to add to that module. That has been very well received in the broker community and has increased the partnership opportunity.

We think that our benefit offering is another step in that direction. So we don't see brokers typically offering these type of technology solutions, and frankly these technology solutions are not readily available in our core target market segment.

So think of 20 to 1000 being our core segment. 20 to 200 or 300 employees very hard to find an automated benefit enrollment solution, certainly available beyond that. And that's where we obviously partner with Bswift. So we think that the combination of investing in healthcare reform tools for our clients and for the brokers combined with this benefit solution is really going to solidify our channel strategy.

Okay great, and I guess Steve I have in my notes you made a remark about where you ended FY14 in terms of quota carrying sales reps, 95. Did you say you were already at your target of 126 or that's what you're striving for as the year progresses, or would it be front end loaded? Just more commentary on where we are in the 126?

I did say we're at our target hiring of 126. We had 126 quota carriers at our sales kick off in late July, so we were very happy with the progress.

Just a review from a hiring perspective, we typically hire in Q4 of the prior year into Q1 of the current year. So sitting here today in August, we were very happy to have all of our quota carriers in at the conference being able to take advantage of some of the training we were able to put in front of them. So we're fully staffed.

And one of these newer sales reps, when do they start to hit their full productivity? Is it the third or fourth quarter of the upcoming fiscal year or is it earlier?

It certainly depends on the start date because we obviously can start bringing them on as early as the start of fourth quarter. But we generally try to think about in terms of really takes six months before we start seeing decent levels of productivity. And then from a full year perspective is probably another quarter before our run rate basis they are at the full first-year productivity that we expect them at.

Okay, and this is my final question. Peter in terms of acquiring the reseller, is there a benefit to gross margins on the recurring side, but just remind us is there any impact on the top line or there is no impact?

There is no impact on the top line.

All right, thanks guys. Nice job.

Nandan Amladi, Deutsche Bank.

Hi thanks for taking my question. I might have asked this before on the last call, but since you became public and you have more of a public presence now, is there any change in the size of your typical customer? And also in the regional presence that you have had obviously you started out in the Midwest and that's where you have your highest density today.

So let me start with the second part first. Our history obviously is the company started here in the Chicagoland area. We really started expanding nationally call it six or so years ago, and today we've got at least small presence in most of the major markets across the country.

So as we add new business, it is happening more outside of the Chicagoland area than it is here. And so from a new business perspective, I think you can absolutely think of us as a national presence from that perspective. So the number of customers in the Illinois marketplace has shrunk on a percentage basis simply because of that national expansion strategy.

From a customer size perspective, we generally stick to our target market of 20 to 1000 employees. In an employment growth environment when you look at GDP numbers, we do typically get a little bit increase in our customer base.

As they add employees a very small percentage. When you think of us growing 40% and customers adding 1% to 2% of employees, it does slightly increase the average size but not materially. No change in our target market focus.

And then second question on Ultimate's recent earnings call, they talk about creating a new segment to address the 300 to 500 employee market. Historically they are played in the two tiers above that. What is your response or perhaps any commentary you might've heard from your prospects about whether you might end up competing on that?

I think I would echo what I said last time in terms of Ultimate which is we don't run into them very often in the marketplace at all. They were for a time period -- if you go back several years they were in the 100 plus marketplace, and we didn't see them frankly very much in the marketplace then, and it's a very large market opportunity.

So they certainly can have some success in that strategic account marketplace, but we think that we will continue to have success in our core market segment even where it overlaps with them. We take a different approach to the marketplace from a sales and marketing perspective.

We think from an implementation perspective and from a product design perspective. And so when you compete with them, we think that we can be successful. But we really don't see them at all in the marketplace, and although that might increase a little bit with this new focus, we don't think it will be material.

Thank you.

(Operator Instructions)

Patrick Walravens, JMP.

Thank you, it's Peter Lowry in for Pat. Can you talk about whether you were seeing a more favorable or perhaps even accelerated demand environment for SaaS payroll solutions overall? And then if you are, maybe you could talk about what your take is on what might be driving that?

I think if you go back several years ago, I talked about our national expansion strategy starting almost six years ago. At that point in time, I would tell you that the sales force was doing a lot of market education in terms of what the benefits of a cloud base provider, SaaS-based payroll offering.

Today we do not have to do a lot of market education. In many cases some of the first questions that we're hearing from the prospects. And I think the market is becoming much more educated in terms of a SaaS alternative to traditional payroll providers.

The other part of your question is are we seeing increased momentum there? I would tell you it's been that way for probably the last couple of years.

So it's incrementally becoming much more acceptable, but I think a lot of that shift has occurred from a knowledge perspective. Now clearly many of the clients have not made the shift to a SaaS provider and that's obviously why we're very excited about the opportunity in front of us because you don't have to spend the time educating. We just have to spend the time telling them why Paylocity is the best cloud based alternative as they evaluate options in the market.

Okay, and then can you talk about -- it sounds like you're very much in the land part of your land and expand strategy, but if there is some time period when you might see a shift more toward the expand side?

I think when you look at less than 2% penetration rate into this large market opportunity, we would really like to land as long as we can. We think getting customers onto the platform is the number one priority at this stage of our growth cycle, so we will stay focused on that.

At the same time as we see demand in our customer base we want to be able to react and provide them the products that they're looking for. We just haven't come up with the targeted effort to really push that simply because we want to use all of our implementation resources to make sure that the new client experience is a great one and one that allows us to retain the customers at the rates that we have, which has been greater than 92% revenue retention. So at this point in time we will stay focused on the land part of the land and expand strategy.

Okay. Thank you. Nice quarter.

Thank you very much.

Michael Huang, Needham & Company.

Thanks very much, hey guys.

Hey how are you doing?

Doing well. Couple questions for you. First of all on the acquisition of the reseller benefiting gross margin, was wondering if there's any other benefits on top of some of the cost of sales benefits that you are seeing here. And I don't know if this was at all a hugely relevant question here, but in terms of when you are thinking about why one reseller acquired versus the other, was there any rationale behind the order you were doing?

So let's just talk about the benefits associated with the reseller acquisition. The cost of the resellers was paid back as part of our cost of revenue.

And so as we purchase that reseller, those costs go away and that gives us a lift in gross margin. And we completed that acquisition in May.

We will obviously continue with that lift in gross margin through on a go forward basis and through this fiscal year. So think of that on a couple hundred basis point range. And that's really the benefit associated with that.

In terms of why we chose to do one or the other, we had an option based off the IPO, and that option had certain notice provisions in periods associated with that. So that was the only reseller that we had the option to acquire during FY14.

We had the option to acquire the second reseller in FY15. We have not made any decisions around timing of that nor have we started some of those conversations. That option does not even become available until fall of this year.

Got you. And then in terms of the headcount that you picked up there, was that part of your quota sales headcount that you shared with us?

Yes, so it was a great market. One of the things that we did is expanded the headcount in the marketplace beyond what was there at the time.

In we interviewed the people who were in that market at the time. We make a decision on whether we want to bring them on board. But regardless the Southern California market was the one we took over, and we've added to the marketplace and that is included in the total 126 headcount.

Got you. And then I know that you mentioned several times that there's no real change here in your target market focus and unit count is pretty steady on a year-over-year basis.

But just curious could you share with us what is what are some of the larger deals that you were doing in the quarter maybe in terms of headcount, and is this upper bound at all trending in any upwards direction? Thanks?

Sure. So I think it is true we absolutely stick to our core target market 20 to 1000 employees. When do we go over 1000 employees?

First of all, it doesn't happen that frequently. One of the things we will point to is we don't have any customers that represent any concentration of revenue which is certainly a proof point to that.

It does happen on occasion. When it happens you might get our organization let's say with 2000 employees, and maybe they have 100 employees in 20 different locations and they operate like 2100 employee companies. When that's the case, we may have a product that is a perfect fit for that organization, and that's something we evaluate very carefully.

We don't just let our sales force evaluate that, we have a sales engineering team, we get operations involved, and if that happens to be a fit, that's what we bring those types of customers on. That customers above 1000 employees have not increased on a percentage basis over time. We've been pretty consistent, so I would call it opportunistic above 1000 employees.

Great. Thanks guys.

And I'm not showing any further questions at this time. I'd like to turn the call back to Steve for closing remarks.

I'd love to thank all of you for taking the time today for the call. And I will actually be presenting with Peter at the Deutsche Bank technology conference in Las Vegas, so for anybody on the call would like to meet with us, we would love the opportunity to share our story and look forward to talking with you in the coming months. Thank you.

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