Paylocity Holding Corp (PCTY) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paylocity Q4 earnings call. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Mr. Peter McGrail, Chief Financial Officer. Sir, you may begin.

Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter and full year of 2015 which ended on June 30, 2015. I'm Peter McGrail, CFO, and joining me on the call today is Steve Beauchamp, CEO of Paylocity.

Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.

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

For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and others disclosures. We do not undertake any duty to update any forward-looking statements.

Also, during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business.

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. The non-revenue financial measures we will discuss today are non-GAAP unless we state the measures as GAAP.

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

Thank you, Peter, and thanks to all of you for joining us on our fourth-quarter earnings call. FY15 represents our first full year as a public company. I'm very proud of the results we have achieved.

Let's start by reviewing a few highlights for the quarter and fiscal year. Total revenue for the fourth quarter was up 40% year over year with recurring revenue up 41%. The fourth-quarter results mirror our FY15 results, with 40% total revenue growth and 41% recurring revenue growth. We finished FY15 with record revenue of $152.7 million.

Adjusted recurring gross margin increased 5.3% to 71.8% for the quarter, up from 66.5% for the same period last year fiscal year. The improvement in adjusted gross margin was a combination of the reseller purchase completed in the quarter along with natural leverage in our business model.

Adjusted EBITDA of $8.2 million for the fiscal year was up 52% from last fiscal year, driven by improvement in recurring gross margin. Recurring gross margin increased 70.7% for the fiscal year, up from 66.2% last fiscal year.

We recently launched Paylocity's enhanced Affordable Care Act module, a comprehensive compliance solution for our clients impacted by the impending ACA deadlines. We continue to invest in our industry-leading platform as research and development investment accelerated in the fourth quarter finishing FY15 at 14.1%, when you combine what was expensed and capitalized.

During the fiscal year, we won best places to work awards in Chicago and for the first time in Rochester, New York. I'm very proud of the culture and the enthusiasm displayed by our employees. We finished FY15 with strong momentum in sales and marketing as we continue to execute our land and expand strategy. Our focus remains on landing new customers as we increased our client base by 22%, finishing the fiscal year at 10,350 clients.

We continue to drive productivity in the sales force as the average revenue per new client increased due to higher adoption of our HCM modules. The increase in average revenue per new client was the primary driver to a 16% increase in recurring revenue per client. Average recurring revenue per client across our client base was $13,900 in FY15, up from $12,000 last fiscal year.

FY15 was also another strong year for our broker strategy as we again generated more than 25% of our new business from broker and financial advisors. We've received qualified leads for more than 2,000 different individual brokers during FY15. The leads provided by broker partners have a higher close ratio than any of our other lead sources.

There are a couple of key trends in the insurance industry that have contributed to our momentum in this important channel. Insurance brokers are increasingly competing against traditional payroll providers and new technology entrants who are seeking to capture insurance commissions. Brokers can leverage their relationship with Paylocity to protect their client base from competitors by recommending Paylocity's industry-leading platform with robust payroll and HCM capabilities along with an extensive data integration.

The second big trend for health insurance brokers is the impact of ACA. Brokers are increasingly faced with the need to advise their clients on the best method to become compliant with the Affordable Care Act. We are experiencing significant interest from health insurance brokers to better understand Paylocity's ACA solution as evidenced by an increase in attendance for our ACA webinars.

As we look ahead to FY16, we will continue to expand our sales force as our primary focus remains landing new clients. We have set our target number of quota carrying sales reps at 164 for FY16, an increase of 30% versus FY15.

We just completed our annual sales kickoff in July where we had all 164 representatives in attendance. I had the opportunity to meet our new hires last month and was very impressed with the quality of industry experienced hires we added to the sales force. There was a tremendous amount of excitement at our annual sales meeting as we celebrated a record FY15, shared key marketing initiatives, and provided insight into our upcoming product road map.

We continue to believe the investments we're making and our SaaS platform create differentiation in the market, and the strength of our product portfolio remains the primary reason why businesses are selecting Paylocity for their payroll and human capital management needs. As a result, we continue to increase our investment in research and development throughout FY15, with accelerated hiring in the fourth quarter. Total research and development was up 56% for the fiscal year when you combine what was expensed and capitalized.

We have a robust product road map, and the increased investment in research and development positions us to extend our industry-leading platform. We made significant progress this past fiscal year, enhancing our talent management offering with a new on-boarding product and a refreshed, fully responsive user experience in performance management, both being key contributors to our higher average revenue per new client.

As we enter FY16, we are positioned to leverage investments in our web benefits product along with our recently introduced enhanced ACA module. ACA represents a great opportunity for us to help our clients navigate the complexities of the Affordable Care Act. As a reminder, applicable large employers, those with 50 full time equivalents, will be required to file 1095 forms the first calendar quarter of 2016. We have scaled our operations team in anticipation of a very busy fall, helping our clients prepare for the filing deadline.

ACA represents another opportunity to demonstrate our ability to provide clients with a combination of industry-leading technology and high-touch service. This combination of service and technology allowed us to once again deliver revenue retention of greater than 92% for FY15. In summary, I would like to thank all of our dedicated Paylocity employees for making our first full fiscal year as a public company a success.

I would now like to turn it over to Peter to review our financial results in more detail and provide guidance for FY16.

Thanks, Steve.

Let me walk through the results and provide some detail. Total revenue for the quarter was $40 million, which represents a 40% increase from the same period in the prior year. Total revenue for the year was $152.7 million, and as with the quarter, was up 40% from the prior year. This was our fourth consecutive year of 40% growth.

Our revenues have two major components, recurring and non-recurring. 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 solutions. 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 and taxing authorities.

Given the current interest rate environment we do 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. For the fourth quarter, our total recurring revenue of $38.2 million was up 41% from the prior year and represented 95% of our total revenue. Recurring fees were up 41%, while interest income increased by $0.2 million or 52%. For the year, our total recurring revenue of $144.1 million was up 41% and represented 94% of our total revenue.

Our non-recurring revenues are comprised of implementation services and other. It primarily consists of implementation fees charged to new clients for professional services provided to implement and configure our payroll and HCM solutions. We recognize revenue for these services when our implementations are complete. These fees typically represent 6% of our overall revenues on an annual basis. Implementation services and other revenue was $1.8 million for the fourth quarter, and $8.6 million for the year, up 19% and 28%, respectively, from the same periods last year.

Like our revenues, we separate our costs of revenues into 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 profit margins further by providing adjusted numbers.

A reconciliation of GAAP to non-GAAP adjusted gross margins 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 $23.1 million, representing a gross margin of 57.7% as compared to $15 million or 52.2% in the fourth quarter of 2014. This improvement was primarily the result of the acquisition of our resellers in natural leverage. Adjusted gross profit for the full fiscal year was $87.2 million representing a gross margin of 57.1% as compared to $57 million or 52.5% for the prior year. We view our adjusted recurring revenue gross margins of the best barometer for our overall long-term margin opportunity as we generate these margins on the vast majority of our revenues.

Our adjusted gross profit [or] recurring revenues was $27.4 million or 71.8% in the fourth quarter, up from $18 million or 66.5% in the year ago. Again, this improvement was primarily the result of the acquisition of our resellers and natural leverage. Adjusted recurring gross profit was $101.9 million or 70.7% for FY15, up from $67.5 million or 66.2% in the year prior.

We're very pleased to note that we finished the year in our long-term adjusted recurring margin target range of 70% to 75%. Over the last two fiscal years we have increased our adjusted recurring gross profit by a total of 610 basis points. Although we don't expect our margin improvement to be linear, we continue to believe that over time, we can generate an average of 80 to 100 basis points of natural leverage per year.

As we've discussed in the past, our adjusted gross margins on non-recurring 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 three to six weeks, especially as we continue to focus on the land portion of our strategy. In regards to implementations, we charge what we believe are market rates, and we'll continue this practice as we continue to gain market share.

As noted in our last few earnings calls, we're incrementally increasing our investments in two key areas. First, we're 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 longer-term impacts and increased brand recognition, including taking a higher profile at industry events and cultivating our relationships with our unique broker 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 expensed and what we capitalize. On a combined, non-GAAP basis, total research and development investments were $6.7 million or 16.8% of revenue in the fourth quarter, compared to $4.2 million or 14.7% in the year-ago quarter. Full year research and development investments were $21.5 million or 14.1% of revenue compared to $13.7 million or 12.6% of revenue in FY14. As Steve mentioned, we have been very pleased with the recent results of our recruiting efforts for talented research and development personnel.

On a non-GAAP basis, sales and marketing expense increased to $11.3 million or 28.1% of revenue in the fourth quarter, as compared to $8.2 million or 28.7% of revenue in the same period last year. For the full year, sales and marketing expense was $39.7 million or 26% of revenue as compared to $27.3 million or 25.2% of revenue in FY14. We continue to be pleased with the recurring fee growth we are experiencing based on this level of investment in sales and marketing.

On a non-GAAP basis, general and administrative costs were $7.4 million or 18.5% of revenue in the fourth quarter, as compared to $5.6 million or 19.6% of revenue in the same period last year. Full year general and administrative costs were $27.2 million or 17.8% of revenue in FY15, our first full year as a public organization as compared to $19.1 million or 17.6% of revenue in FY14. Our non-GAAP general and administrative costs exclude the amortization of acquired intangibles that resulted from the acquisitions of our two resellers.

Our adjusted EBITDA was $0.6 million for the quarter versus negative $0.3 million for the year-ago quarter. Our adjusted EBITDA for the year was $8.2 million versus $5.4 million for the year prior, a 51% increase. For the fourth quarter, non-GAAP net loss was negative $1.5 million or negative $0.03 per share, based on 50.7 million basic and diluted weighted average common shares outstanding. For the year, non-GAAP net income was $0.4 million or $0.01 per share, based on 50.1 million basic weighted average common shares outstanding.

Briefly covering our GAAP results for the quarter, gross profit was $21.9 million. Operating loss was negative $4.3 million, and net loss was negative $4.4 million. On a full year basis, gross profit was $81.8 million. Operating loss was negative $13.9 million, and net loss was negative $14 million. In regard to the balance sheet, we ended the year with cash and cash equivalents of $81.3 million.

From a cash flow perspective, we generated $11.1 million in cash from operating activities in the year ended June 30, 2015, and spent $9 million in property, plant, and equipment. Our cash flows from investing and financing activities are influenced by the timing and amount of funds held for clients, which offset but varies significantly from quarter to quarter. Funds held for clients are restricted solely for the repayment of client fund obligations.

Finally, I'd like to provide our financial guidance for the first quarter and full year of FY16. Total revenue in the first quarter is expected to be in the range of $41 million to $42 million. Adjusted EBITDA is expected to be a loss in the range of negative $2 million to negative $1 million. Non-GAAP net loss is expected to be in the range of negative $4.5 million to negative $3.5 million, or negative $0.09 to negative $0.07 per share based on 50.8 million basic and diluted weighted average common shares outstanding.

Total revenue for the full year FY16 is expected to be in the range of $199 million to $203 million. Adjusted EBITDA is expected to be in the range of $10.5 million to $12.5 million. Non-GAAP net loss is expected to be in the range of negative $4.2 million to negative $2.2 million or negative $0.08 to negative $0.04 per share based on 51 million basic and diluted weighted average common shares outstanding.

One final note, Steve and I will be presenting at the Deutsche Bank technology conference in Las Vegas on September 17. In summary, we're very pleased with our operational performance during the fourth quarter and full FY15.

Operator, we are now ready to begin the Q&A session.

(Operator Instructions)

Justin Furby of William Blair & Company.

Congrats on another fabulous quarter. Steve, I wanted to start by asking about attach rates or their trending. I'm curious. This past fiscal year, what percentage, if you could give a rough sense of the new business in FY2015 that was payroll only, versus deals that are testing the other things, and how that's been trending? I was also hoping you could drill specifically on core HR attach, and where that's been trending? If you look out to FY2016, where, from a product standpoint, do expect to see the most meaningful uptick in terms of new deals? Several questions.

Yes, several questions. I think I have it down here, Justin. Thanks for the questions. Overall, we don't give very specific attach rates, but I can certainly give you some color. There's no question that higher attach rates in core HR, talent management, time and labor and benefits are the driver of the 16% year-over-year increase in revenue per unit. That is really been driven by selling more to the new customers versus selling back to the base. I would tell you that really we're seeing an increase across the board, in all of the categories outside of payroll that's driving that. I highlighted in my opening remarks that talent management had a good year for us. That would probably be the one out of the additional four categories that probably had the highest year-over-year increase.

I think your second part of your question was core HR. Core HR is the highest attach rate of the other four categories. It's certainly higher than time and labor, talent management, and benefits. We continue to see that rise. We don't have quite as much headroom there, but it does continue to increase. We think that we have opportunities to increase attach rates in every category with the exception of payroll.

Okay. We do get into a little bit more on ACA, and how you are thinking about monetization? These new forms, the 1095s, does that essentially cause greater seasonality in revenues this year in fiscal Q3 as you recognize that (inaudible)? How should that play out?

First of all, anytime we introduce a new product to the marketplace, we really try to get experience with the customers, learn from that, adapt and make changes, both from a product perspective. It could be what we bundled together, how we price. I would say we are very early in that stage right now. We have our enhanced ACA product that we've been introducing to customers. We've been getting feedback from our customers. We do think there is a monetization opportunity, but it's not the primary one we are focused on right now. The biggest thing for us is to make sure we satisfy the needs of our customers that need that, and that we really introduce what we have to the referral channel.

I think the market, as a whole, is really circulating around what this looks like from a monetization perspective. At this point in time, we would not be changing the look around seasonality revenue going into next fiscal year. We do think ACA represents a financial opportunity to us, but it's very early and very difficult at this point to give any color on what that looks like. As the year rolls on, we hope to be able to give you a better insight.

Okay. Great. That's helpful. You guys, obviously, continue to execute extremely well, and I'm curious. If you look out over the next three years or so, with growth were to come down to, say, below 30%, I don't think it does, but if it were, what do the be the most likely driver of that? Would be inability to find the right sales reps and talent? As you get bigger, would it be competitive changes? What do you think would be the biggest potential hurdle here over the next, call it, three to five years?

I think we're certainly very proud of the consistency level of our growth rate. Several years in a row we've been at this 40% level. The key point there is that's been driven by overperformance in our sales force. Our sales force has had phenomenal years, and really from that perspective, if we were to have a decline in our growth rate it would likely be tied to us not being able to have that same level of overperformance that we've seen the last several years. It certainly isn't due to a lack of opportunity.

We still have less than 2% share of a very large marketplace, and so we feel like we have the opportunity to go after it. We want to do it in a quality fashion. I think you've heard us say many times that we want to make sure the implementation experience is great for our new customers. That's really our governor of growth, but if we were not able to overachieve at the same rate we have historically, it would be likely because we're selling a little less in the marketplace.

Okay. That's helpful. Maybe one more, Peter, for you, last year, you guys set out an EPS target, at this time last year, and you obviously beat it handily. I'm just curious. Is there any change to that approach in guidance this year? If revenue outperforms in FY2016 do you expect to let that flow through to the bottom line? I also wanted to drill specifically into gross margins this year, and what your guidance entails there?

We don't give guidance on gross margin out, when we guide. We had certainly tremendous performance in this last fiscal year in gross margins. We will call it 500 basis points on the around, so that was terrific, primarily from resells, but certainly a lot from natural leverage. I think in my prepared comments I mentioned that we don't expect gross margin improvement to be linear over time, but certainly we would expect natural leverage to average out over an extended period of time to 80 to 100 basis points a year. Certainly that's a continuing goal of ours. Then concerning the initial part of your question, I actually, could you tell me? Could you ask it one more time?

Yes, it was around your approach to guidance in terms of letting potential revenue outperformance flowing through to the bottom line this year?

I think we think of it a couple of ways. We certainly have seen revenue overperformance in the past. We certainly don't count on it. When it happens, we make decisions around whether there are investment opportunities we ought to be taking, or we ought to be hiring. There's a lot that goes into that decision, but we consider it carefully, if and when that overperformance occurs.

Got it. Thanks very much guys. Congrats, again.

Nandan Amladi of Deutsche Bank.

Thanks for taking my question. On sales capacity, Steve, as has been your sales practice once a year, you provide a quota carrying rep target for the year. That implies about a 30% growth, and your guidance for revenue growth is also about 31%. Historically, those two have track together pretty closely. The back the question is, if, indeed, through the year, you realize that you're tracking ahead on the revenue side, would you be adding more sales capacity? Or is your focus more on R&D as you said in the prepared remarks?

Sure. I think we've had a pretty consistent cadence around hiring from a sales perspective. Our hiring season is in the spring, and then, early and through the summer. We were fortunate to get all of our quote carriers in at kickoff. That's the second year in a row were able to do that, so we are very happy with that. There is a little bit of hiring that happens after the fact, if there is turnover or opportunistically. Largely, we stick very closely to the quota carrying number for the balance of the year.

We look at what the productivity is, in terms of driving overall sales capacity. I don't think that if we have different results than what we've forecasted that that would necessarily drive material difference in terms of sales expansion. We will look at that again, as we go into our budget season for the following year. We will plan for that. We will start hiring again next spring and into the summer. We think that cadence really works for our business.

Thanks. A quick follow-up if I might, on the attach rates, you touched on this a bit earlier. As the new products roll out, how should we think about the contribution from increased attach rates, the new customer base versus perhaps upsell into the existing base? I know the latter has not being a big emphasis for you historically.

We will continue to focus on land versus expand as we go into next year. I think we've always indicated the expand part of the equation will come in at some point in time. It will come in, in a very gradual fashion. I think at this point, we're still focused on land. We want to add as many new customers as possible and gain market share. We certainly have a track record of being able to increase that average revenue for customer focusing mainly on land.

If we see more demand in our customer base for some of those solutions that we have, we certainly want to fill that demand, but we would see that in a gradual fashion. I think the big message here is mostly land, once again, this fiscal year.

Thank you.

Terry Tillman of Raymond James.

Congrats from me as well. I'll keep myself reined in with my questions, or at least a number of them. Steve, you guys were pretty transparent in terms of, I think, even in the filings, you'll give an update if a customer were to buy all your modules at list, what that employee per year looks like? You've even talked about now, and you've emphasized the R&D investment as a differentiation. You said you've even accelerated some of the hiring in R&D at the end of the year. Where we trended now in that per employee, per year? Have you changed the longer-term goal on what it could potentially get to?

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

Got it. You do provide occasionally a metric on how many brokers or third parties are influencing business, and you talk about that usually having a strong close rate opportunity. The 2,000, how do we think about that into FY2016 and beyond? You are talking about ending more. Peter talked about in terms of in the guidance. You're going to spend more to really go after that opportunity. Is it doing more with the same, or should we see that number of 2,000 grow significantly into 2016 and beyond?

The first point I'd make is you are right. Peter in his opening remarks said that since our IPO, we've invested incrementally in R&D and sales and marketing. If you go back historically, the keyword for sales and marketing as incrementally. I don't think, by any means, that was a statement of the past versus the future, but we will continue to invest in the broker channel. We see it as both increasing the number of individual brokers that are providing us leads, as well as getting more leads from the broker network that we have.

We've seen both of those two opportunities in front of us. We think ACA creates a great opportunity with the subset of health insurance brokers. We've seen increased activity level with them, and of course, we are still seeing that channel close at higher rates than any of our other leads sources.

Thanks, Steve.

Scott Berg of Needham & Company.

Steve and Peter, I'd like to echo the sentiment on the great quarter. Two quick ones for me, I guess, first on the guidance, Peter, is the guidance suggests that the second half of the year is likely more profitable than the first half. Is that a reflection of frontloading some of the new investments for the year, or is there just a general [other dynamic model], say, natural leverage that you think occurs as we get through the next 12 months?

I think you hit it on in your first statement. You saw the R&D investment as Steve spoke about, and I actually spoke about in the prepared remarks. We had a great opportunity to hire talented R&D personnel. We took advantage of that in the fourth quarter. That will roll for the first couple of quarters, but we're very excited about the opportunity that they present to us.

I think largely that's what you see. As we prepare for ACA, were actually, as Steve mentioned in his remarks, we are gearing up operationally. Steve talked with the monetization thing, but separately we operationally have to handle those clients, and want to provide them the best experience possible. We've invested the little more in that operations force so that we can assure ourselves that we can do that.

The last thing I would add to that comment is we had a great selling season last January quarter. When we get a lot of business in that January quarter, we're typically staffing up the next couple of quarters after that to handle that because, as you know, we sell a customer. We get them implemented relatively quickly, so there is no backlog concept. As the volume comes, we are often hiring a little bit after the fact. It's really a combination of getting ready for ACA, having some opportunity to invest in R&D personnel, which as you know, are hard to find. We've been very successful with that, and then hiring up a little bit this last quarter in preparation for this fiscal year.

Okay. Great. Thanks. The one follow-up I have is on the R&D personnel that was higher than the 15% of revenue when you count the expense and the capitalized components together that talked about recently getting to that level. Should we think about 2016 in general as being elevated about that 15% level, or does that normalize back down to that 15% in the year?

As you know, as I mentioned, I think finding great R&D talent is extremely difficult. When our recruiting team and our executive team in R&D has opportunities to find additional talent, we have a robust road map. We certainly have enough to invest in. We like to take advantage of that opportunity. I don't think we're tied to 2015 as necessarily being an exact ceiling to that. We certainly think we get great return on our R&D investments, so we would make them.

At the same time, I wouldn't tell you that we think that dramatically different than the 15% is where we want to be. If we have the opportunity to go above 15%, and we think we can get the return on it, we would make those investments, but I wouldn't look at that is being dramatic.

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

Jim Macdonald of First Analysis.

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

Yes. Jim, the first point I would make is it's fairly dynamic when you've got these government deadline, and many of our competitors racing to a product for their customers, and then getting feedback from their customers, and reacting to that. What I would say to you is we've seen some changes early in our ACA lifecycle already, in terms of what's happening in the marketplace. It's a little early to give you really specific color.

There are a couple of models out there. There's a per employee, per month model, and we will have that available certainly. Then there is a per form model. It's difficult to give you a good sense of what that mix is. At this point in time, we're not forecasting different seasonality of revenue. We're just reacting to what we see early, and we think we've got a lot of flexibility to deliver the customers what they need, which is really the most important part of the equation.

Just to ask my question again a different way, are you staffing up on the implementation side? (inaudible)

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

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

Obviously, that is a magic question for us early in this equation. We'd love to know the answer for that. It would be very helpful in many regards. However, I think philosophically, I do think that somebody who is already the payroll and HCM vendor has an opportunity to drive higher penetration rate. We certainly have ours for many of our customers who are using our benefits. We have benefit information. If they are using our time and labor system, we are actually tracking that on a daily basis.

We think the fact that we have all this information already puts us in a much better in position to be able to sell the solution versus a standalone provider. I think maybe at the upper end of our market they might potentially look at standalone provider, but certainly in the core, 50 to several hundred employees, we have an advantage.

Right. One minor question, especially for you guys, but what are you thinking about for checks per payroll going into your guidance for next year?

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

Right. Thanks, guys.

Jeff Houston of Northland Securities.

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

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

Great. As you're growing our sales force 30% this fiscal year, what's the typical background of the sales people that you're hiring? Are they coming from the traditional bureaus like ADP and Ceridian? Or are you looking outside of the payroll industry?

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

Okay. Great. Last question for me (inaudible), as you think about international expansion, is that way off on the road map? I assume you'd probably go there first with your non-payroll products? Just some color there would be great.

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

Okay. Thank you.

Patrick Walravens with JMP Securities.

I have a couple questions. My first one is, Steve, you mentioned at the beginning new technologies that represent competition for your insurance broker channel. Possibly, we're talking about things like Zenefits. My question would be, what size companies are those kinds of solutions most appropriate for? Where does it really work?

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

Okay. That's helpful. You've touched on this, but as investors think about your story over the next three to five years, how would you like them to think about what your target growth rate is? Not if those sales guys are overachieving, and we realize some of years you will do better. Generally, how should we think about the growth rate for this? Maybe one analogy that (inaudible) investors are familiar with, and I know you are too, is Ultimate for a long time said 25% recurring revenue growth. What's the equivalent for you guys?

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

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

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

We're talking about for the guidance for next year versus the Street.

Okay. On adjusted EBITDA or non-GAAP net, or both?

EPS.

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

Okay. The negative $0.04 to negative $0.08 versus the consensus of [$0.02], that's the main reason?

Exactly.

Okay. Great. Thank you very much.

(inaudible) of Bank of America Merrill Lynch.

I had two quick questions. You touched a little bit upon this earlier. Has there been any significant shifts in the competitive landscape what you've been seeing on the market? There's been a lot of movement in the space, maybe at the low end, possibly the high end, lots of movement around that ACA. Has that significantly changed? The second question was just the annual revenue retention rate, is that still greater than 92%?

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

Okay. Got it. Thanks.

At this time, I'd like to turn the call back to management for any closing remarks.

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

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