Paylocity Holding Corp (PCTY) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paylocity Holding Corporation's Third Quarter 2017 Fiscal Year Results.

(Operator Instructions) As a reminder, today's conference call is being recorded.

I would now like to turn the conference over to Peter McGrail, Chief Financial Officer.

Please go ahead.

Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal 2017, which ended on March 31, 2017.

I'm Peter McGrail, CFO, and joining me on the call today is Steve Beauchamp, CEO of Paylocity.

Today, we will be discussing the results announced in our press release issued after the market closed.

A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.

Before beginning, we must caution you that today's remarks in this discussion, including statements made during the question-and-answer session, contain forward-looking statements.

These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements.

Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements.

For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures.

We do not 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 measure as GAAP.

Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to their directly comparable GAAP financial measure, because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

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

Thank you, Peter, and thanks to all of you for joining us on our third quarter earnings call.

We had a very good quarter, with total revenue growth of 27.9% and recurring revenue growth of 28.7%.

We were able to post strong revenue growth while at the same time delivering a record level of adjusted EBITDA.

Through the first 9 months of this fiscal year, adjusted EBITDA is up more than 77% from the same period last year.

At the time of our IPO, we outlined a long-term model of 20%-plus revenue growth and 20% adjusted EBITDA margins.

We are on track to make significant progress this fiscal year towards our long-term adjusted EBITDA target of 20%.

The impact of ACA on new sales continues to moderate as we see the market returning to historical buying patterns, where clients generally prefer to make a change at the start of each quarter and at the start of the new calendar year.

This is also the case in our broker network, where we were pleased to generate more than 25% of our new business in the third quarter, consistent with pre-ACA historical levels.

As you may recall, broker referrals peaked in the first and second quarter of fiscal 2016 almost reaching 40% and have since stabilized above 25% the last several quarters.

The Paylocity value proposition remains strong for brokers as new technology entrants, increased legislation and commission reductions all create pressure for brokers to differentiate and grow their business.

Brokers appreciate our focus on delivering modern technology and they are taking advantage of Paylocity's APIs and our broker portal to deliver a seamless experience to their clients.

Our most recent update to the portal now provides the ability for a broker or financial adviser to send communications directly to our clients' employees, providing an efficient means to educate employees on their benefit package.

As a reminder, all of our new business sales, even those leads referred by a broker, are sold by our direct sales force who operate locally in major markets across the U.S. We are actively growing our sales force, as we do every year at this time, with a goal of completing our hiring this summer, such that all new reps are trained prior to the fall selling season.

We're pleased with the talent we've been able to attract early in our annual hiring cycle and will provide a more detailed update on our progress and target number of quota-carrying sales representatives on our next earnings call.

Adjusted recurring gross margin increased to 77.6% in the third fiscal quarter, up from 75.2% for the same period last fiscal year as we continue to drive efficiencies in the business.

The third fiscal quarter is our highest margin quarter due to the recurring fees collected for W-2s in annual tax form filings.

All the operational hiring and training completed prior to year-end paid dividends for our clients with streamlined delivery of W-2s and 1095s and improvements in responsiveness and issue resolution during our busiest time of the year.

Clients were much more proactive using our year-end dashboard and real-time preview capabilities to identify potential issues with W-2s and 1095s, creating efficiencies in our year-end process.

The focus on combining leading technology with high-touch service continued to be the formula that allows us to deliver 92%-plus revenue retention.

We continue to increase our investment in research and development.

Our product and service organizations work directly with our customers to solicit ideas and enhancements and their feedback determines the next initiatives on our product roadmap.

Our 2 most recent product releases are great examples of the customer as a co-creator principle that drives our agile development process.

Based on feedback from our first set of clients, we've added numerous features to both our recruiting and expense products, allowing us to quickly grow the number of clients.

Recruiting recently surpassed 300 clients, and expense management, just released this January, now has 150 clients.

We are committed to balancing our investment in research and development by delivering new innovative solutions to expand the platform, while at the same time enhancing our feature set based on client feedback.

During the quarter, we were able to sign a lease to move into a brand-new facility in Boise, Idaho.

We anticipate moving into the new building during the summer of calendar year 2018.

The Boise expansion will provide us capacity to more than triple our existing workforce in that market.

In addition, we expect to occupy the first 2 floors at our new headquarters in Schaumburg, Illinois, at the end of this fiscal year.

We leased approximately 300,000 square feet over 14 floors in the South Schaumburg Tower, and we'll phase into our new headquarters gradually over the next few years.

The ability to design a purpose-built space that reflects our culture and provides our employees with a modern and collaborative environment will help us attract and retain the talent necessary to achieve our long-term goals.

Lastly, we are very pleased to win 2 Best Places to Work awards during the quarter.

Paylocity was chosen a top workplace in Rochester, New York, and one of the Best Places to Work in Boise, based on feedback from employees.

This is the third consecutive year we have won the award in Rochester and the first time we have participated in the survey in Boise.

I will now turn the call over to Peter to provide more details on our financial results.

Thanks, Steve.

Let me walk through the results in more detail.

First and foremost, for those of you who may not be familiar with our business, we experience fluctuations in revenues and related costs on a seasonal basis.

Our third quarter revenue was positively impacted by our preparation of W-2s for our clients' employees and by the addition of new clients that switched providers at the start of the new year.

Our costs on this additional revenue increased during the same period.

Total revenue for the quarter was $90.3 million, which represents a 27.9% increase from the year-ago quarter.

Total revenue for the first 9 months of fiscal 2017 was $223.9 million, a 31.1% increase from the same period last year.

Our total recurring revenue of $86.4 million was up 28.7% from the year-ago quarter and represented 96% of our total revenue.

Total recurring revenue for the first 9 months of fiscal 2017 was $215.1 million, a 32.5% increase from the same period last year.

Recurring fees were up 28.7% in the quarter and 32.6% for the first 9 months of the fiscal year and interest revenue increased 29.6% in the quarter and 27.9% for the first 9 months of the fiscal year, primarily as a result of our client growth and balance increases.

Our average daily balance of funds held for clients was approximately $800 million for the first 9 months of fiscal 2017.

Implementation services and other revenue was $3.9 million for the quarter, up 12.3% from the year-ago quarter.

Implementation services and other revenue is up 3.9% through the first 9 months of the fiscal year from the same period last year.

Adjusted gross profit in the quarter was $61.7 million, representing a margin of 68.3% as compared to $45.6 million or 64.7% in the year-ago quarter, a 360 basis point improvement.

This improvement is primarily a result of natural cost leverage in our business as we continue to balance the investments required to provide high-touch client service while also steadily moving towards our long-term profitability model.

Additionally, we experienced leverage on benefit costs in the third fiscal quarter as we transitioned to a self-insured model at the start of calendar 2017.

Adjusted gross profit for the first 9 months of fiscal 2017 was $142.1 million or 63.5% as compared to $105.4 million or 61.7% for the first 9 months of fiscal 2016, a 180 basis point improvement.

Our adjusted gross profit on recurring revenues was $67 million or 77.6% in the third quarter as compared to $50.5 million or 75.2% in the year-ago quarter, a 240 basis point improvement.

Adjusted gross profit on recurring revenues was $160.7 million or 74.7% for the first 9 months of fiscal 2017 as compared to $119.6 million or 73.7% for the first 9 months of fiscal 2016, a 100 basis point improvement.

We continue to invest in research and development.

In addition to significant new modules, such as recruiting and expense management, we are equally committed to refreshing and modernizing our platform.

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, total research and development investments were $9.9 million or 11% of revenue in the third quarter.

On a dollar basis, our year-over-year investment in total research and development increased by 23.9% in the third fiscal quarter and 28.3% for the first 9 months of fiscal 2017 versus the same periods of fiscal 2016.

On a non-GAAP basis, sales and marketing expense was $19.5 million or 21.6% of revenue in the quarter as compared to $16.5 million or 23.3% in the same period last year.

Non-GAAP sales and marketing expense was $51.9 million or 23.2% for the first 9 months of fiscal 2017 as compared to $41.1 million or 24.1% for the first 9 months of fiscal 2016.

On a non-GAAP basis, general and administrative expense was $11.8 million or 13% of revenue in the quarter as compared to $10.3 million or 14.6% of revenue in the year-ago quarter, a 160 basis point improvement.

Non-GAAP general and administrative expense was $34 million or 15.2% for the first 9 months of fiscal 2017 as compared to $27.5 million or 16.1% for the first 9 months of fiscal 2016, a 90 basis point improvement.

We continue to leverage our G&A cost following our IPO in March of 2014.

Our adjusted EBITDA was $26.8 million or 29.7% of revenue for the third quarter versus $14.6 million or 20.7% for the year-ago quarter, a 900 basis point improvement.

For the first 9 months of our fiscal year, we've generated $44.7 million of adjusted EBITDA or 19.9% of revenue versus $25.1 million or 14.7% of revenue for the same period last year, a 520 basis point improvement.

Non-GAAP net income was $21.6 million or $0.40 per share for the quarter versus $11.3 million or $0.21 per share in the year-ago quarter.

For the first 9 months of our fiscal year, we generated $31 million of non-GAAP net income versus $16.3 million for the same period last year.

Briefly covering our GAAP results.

For the quarter, gross profit was $58.2 million, operating income was $14.9 million and net income was $14.8 million.

In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $101.5 million.

Cash flows generated by operating activities were $27.9 million in the quarter versus $18.3 million in the year-ago quarter, a 52.5% increase.

For the first 9 months of our fiscal year, we have generated $43.3 million of operating cash flows versus $29.1 million for the same period last year, a 48.8% increase, which is a direct result of our increased net income.

As Steve noted, we are expanding into a new Boise office and also phasing into additional space in Chicagoland area beginning this quarter and into the next few fiscal years.

As a result, we may see capital expenditures, excluding software capitalization, trend towards the high end and possibly slightly above the 6% to 7% of annual revenue we have historically targeted.

Finally, I would like to provide our financial guidance for the fourth quarter and for the full year of fiscal 2017.

Consistent with the discussion on our most recent earnings call, we do not have clarity on the timing of a potential repeal or replacement of the Affordable Care Act.

As a result, our guidance includes ACA enhanced revenue the remainder of the fiscal year, as we are committed to keeping our clients in compliance with current and future legislative changes.

We continue to anticipate that ACA revenue will represent 7% to 8% of our total revenue for fiscal 2017.

With this as a backdrop, total revenue in the fourth quarter is expected to be in the range of $73.1 million to $74.1 million, which represents approximately 22% to 24% growth over the fourth quarter of last year.

Adjusted EBITDA is expected to be in the range of $5.3 million to $6.3 million.

Non-GAAP net income is expected to be in the range of $0 million to $1 million or $0.00 to $0.02 per share based on approximately 54.5 million diluted weighted average common shares outstanding.

Total revenue for the fiscal year is expected to be in the range of $297 million to $298 million, which represents revenue growth of approximately 29% over the prior year.

Adjusted EBITDA is expected be in the range of $50 million to $51 million, an increase of $8 million from previous guidance.

At the midpoint of guidance, adjusted EBITDA represents 17% of revenue for the year and a 470 basis point increase from our fiscal year '16 results.

We continue to be confident in our ability to scale as our business grows.

Non-GAAP net income is expected to be in the range of $31 million to $32 million, an increase of $8.5 million from previous guidance or $0.57 to $0.59 per share based on approximately 54.5 million diluted weighted average common shares outstanding.

In summary, we are pleased with our performance in the quarter and our ability to grow revenue at a healthy rate while also driving strong leverage across our business.

One final note, Steve and our SVP of Product and Technology, Ted Gaty, will be attending the William Blair Growth Stock Conference in Chicago on June 13.

Steve will also be attending the Stifel Technology, Internet & Media Conference in San Francisco on June 5 and the Baird Investor Conference in New York on June 7. They will be joined at each of these events by Ryan Glenn, our Director of Finance and Investor Relations, who will take a more active role in our ongoing dialogue with the investment community.

On a personal note, I will be unable to travel over the next several months as I have recently been diagnosed with cancer and while I will remain engaged in the business, I need to focus on completing my treatment plan.

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

(Operator Instructions) And our first question comes from Justin Furby of William Blair & Company.

Congrats.

And Peter, certainly, thoughts and prayers coming your way on that news, on your diagnosis.

Steve, I wanted to start and ask about just the quarter and the linearity you saw.

And just curious if you saw any changes as you went along the quarter and into April in terms of sales cycles getting any faster.

Some of the private vendors that we've spoken to have mentioned some improvement, particularly in the month of March.

I'm just curious if you saw that?

And then ADP highlighted some churn elevation, both in the enterprise as well as mid-market.

I'm just curious if maybe you're seeing a bit higher mix of business coming in from that channel or what you make of it?

Sure, so I'll start with the last part first.

I think we've consistently said we don't necessarily see a small change in ADP's retention necessarily translate to either more or less momentum in our sales activity.

We've consistently get the majority of our business from ADP and Paychex.

That was not different.

We see them most frequently and a small movement in their retention really doesn't drive it.

So I wouldn't highlight that as a change.

On the first part of your question, the first part of the year wasn't what we expected.

The broker channel, as you know, declined much faster than we expected.

And I think in my prepared remarks, I highlighted the fact that we're starting to see clients back to the typical type of behavior we would see where they look to start in April and July and October.

Clearly, we have clients start every week and almost every day with us, but back to that kind of normalized behavior, where the evaluation process is starting to build towards those quarters starts.

So I think, overall, we're starting to see things normalize.

Got it.

And then from a sales productivity standpoint, Steve, I'm just curious what you're seeing from the class that came in last year, in particular, as well as the overall rep population for this year so far?

And then I know you're going through a hiring right now for fiscal '18, but could you give a sense for how much of that you plan to be through traditional channels of folks from the industry versus just some of the newer channels?

Sure.

So I think overall from a productivity perspective, the first part of the year was a little bit tough.

It was a very difficult comp because we had so much activity last year at the same time frame.

We are definitely seeing things on a year-over-year basis much better than we did the first half of the year.

So I look at my productivity for the last quarter, the first quarter of the calendar year, much better from a sales productivity perspective for sure.

From a hiring perspective, we're early in the cycle.

Frankly, we have really done a lot with our training and development process, we're always tuning that.

We feel like we've got a training and development process that's actually pretty consistent between reps that come from industry experience and reps that maybe have business-to-business sales experience, but not industry experience.

So we run them through the same process.

We don't have different hiring groups and so we give the flexibility to our management team to go and find the best sales talent possible.

So I would just be hazarding a guess at this point to know what the mix looks like.

I would imagine that we are probably going to still see more industry hires, but they've got the flexibility to hire the best talent that they can find.

And our next question comes from Scott Berg of Needham.

Steve and Peter, congrats on a fantastic quarter and I would certainly send my thoughts to Peter during this time.

I guess, the 2 questions I have.

First of all, Steve, can you comment a little bit more on some of the new product sales that you're seeing.

You talked about expense and recruiting, but are most of those sales upsells to existing customers?

Or are they being attached to maybe the initial sales for your core product?

Yes, good question.

I would say most of the sales are being attached to new customers, for sure.

As we've talked about in the past, we haven't necessarily focused a lot of attention on upsells.

We have been doing more of that starting with ACA last year and then maintaining an inside sales team this year.

So some of our earliest customers on the product were current clients.

And that's kind of our typical cycle, get the current clients on, release it to new sales and then start to scale it from there.

Most of it to new customers, but there are some current customers that we've upsold as part of those accounts as well.

Great.

And a follow-up for Peter.

I might have missed it in your prepared remarks as I was writing something down.

But I think you were talking about your capitalized software development expense.

As I look through the model, that's increased a little bit more than I would have expected in the last couple of quarters, yet your expense number is coming down.

I know we always look at those on a combined effort given your history there.

But just trying to understand kind of what that looks like in the next maybe 2 to 4 quarters?

And how does the runoff in terms of that amortization when it hits?

Is it going to be any different just because of the level?

Or is it tied to different projects?

Just trying to put that together, I guess.

You're right, and that would give the combined number, because we think that's the most important number to give, our total commitment to research and development.

We capitalize according to GAAP rules, so we capitalize what we think we're supposed to capitalize, in conjunction with conversations with our auditors.

As far as amortization goes on that, we typically amortize those things over a very short period of time, 2 years is our typical product amortization rate.

But again, when we do projects, we sit down and consider amortization time frames and how long that product will last when we go through those individual products.

And our next question comes from Nandan Amladi of Deutsche Bank.

Peter, all the best with your treatment.

Hope to see you back to health very soon.

Question is actually -- both these questions are on the financial model.

What should we expect the gross margin trajectory to be as we -- as you march towards the 20% EBITDA roadmap?

Sure.

So if you look at our guidance for the year now, we're guiding almost 17% adjusted EBITDA and have made some big improvements this year along that path.

I think we originally kind of think about probably 100% in gross margin and then 100% maybe in kind of operating leverage.

So roughly 200 basis -- bps points is what we kind of look for at the start of the year.

We're going to obviously do a lot more than that this year.

It's not always linear, so we have to make investment decisions every year.

But I think we feel good that, that type of pace is kind of a good straw man.

And then if we have better performance than that, we get a little more, and if we decide to make some investments, maybe a little bit less.

But that's our thought process.

Okay.

And then on the CapEx profile, given your new office locations and the replatforming effort, what do we expect the cadence of the CapEx to be, say, for the next 4 to 6 quarters, since that the -- looks like the time window of moving into your new locations?

Let me just handle the first part of the question, which -- I'm not sure what you mean by the replatforming effort.

I think our view on the product is we're constantly refreshing it, we're reacting to client feedback.

But I wouldn't tell you that we have some huge replatforming initiative by any means.

So it's more of just the fact that we're investing more in maybe slightly longer-term initiatives that's driving the R&D part of the CapEx, and then maybe you can talk about the building and the rest of it, Peter.

Yes, so what we highlighted in our prepared remarks is that we normally spend between 6% and 7% on noncapitalized software CapEx in any given year.

We expect that to tick up, not in a major way, but tick up potentially over 7% over the next 4 quarters as we move into -- as we start to move into our new headquarters and build out Boise.

And our next question comes from Corey Greendale of First Analysis.

This is Ken Wang on for Corey.

And Peter, certainly our thoughts go out to you and your family.

So just wondering, you mentioned recruiting and the expense management modules, but are there any other modules that were especially successful in terms of sales during the quarter?

Sure.

So if a client were to buy all of our modules today, they're going to purchase about $280 per employee per year of product.

Of course, payroll, everyone has to have.

And then I think I would tell you in terms of where we see a lot of momentum, certainly the talent category.

So in the talent category for us is on-boarding, performance management, recruiting, those all performed very well for us.

We continue to see increases in time and labor and benefits, but if I were to highlight one category that might be a little bit more, it would be the talent category.

That's really helpful.

And then just looking at the Q3 revenue results and then revenue guidance.

I was just wondering, was there any pull forward from Q4 into Q3?

No, I wouldn't say that.

I've got to go back, if you take a look at what we guided in the last 3 quarters.

So Q2, we guided to about 21% at the midpoint, Q3 we guided about 25% at the midpoint, Q4 now we're guiding about 23% at the midpoint.

So I think we've actually had fairly consistent thought process around guidance.

It's a pretty transactional business.

We've got to sell it, we've got to bring it on board, and so I wouldn't read in too much that there's a different thought process happening with Q4.

It's really actually been pretty consistent how we've looked at it the last couple of years.

We feel good about a 29% revenue guide for the year and 17% adjusted EBITDA.

And our next question comes from Ross MacMillan of RBC Capital Markets.

Congratulations from me as well.

And again, Peter, my thoughts and prayers are with you, too.

Steve, just on the sales environment.

How would you describe the new sales bookings in the quarter relative to your expectation?

I heard your comments on the broker channel getting back to that 25% of lead pass-through.

But just more generally, how would you describe the way that the March quarter turned out relative to your expectation?

Yes.

So I think overall, we're starting to see recovery, really, in the marketplace from a sales perspective.

The first 6 months of the year were a little bit of a surprise to us.

Part of that was, certainly, driven by the broker channel, which we've talked about.

I think we're seeing clients go back to kind of a normal cycle of decision-making.

We're seeing good strong level of activity in the quarter.

And when we look at our performance this past quarter versus last year from a sales perspective, we're seeing some good productivity increases as well.

So I think overall, positive, heading in the right direction.

That's great.

And then you commented, obviously, on recruiting and expense.

As you think forward, I know you don't want to give everything in your roadmap, but maybe you could just give us an idea of some of the new investments that you are making today, vis-à-vis future products, either in terms of enhancements on existing, or new products.

And should we expect -- related to that, should we expect your, call it, PEPY ceiling to continue to migrate higher?

Yes.

So I think we had a goal a little more than 3 years ago to get the PEPY from 200 at the time of our IPO to 300 per employee per year.

So we've made very good progress.

It's still our intention to get to the 300 and frankly, go beyond.

So we certainly believe that we've got the initiatives in-house that we're currently working on that will have some incremental PEPY opportunity.

We're actively working on those.

We typically announce those once they are generally available.

And I think, across the categories, from HR, to time and labor, to benefit and talent management, we think we have incremental PEPY opportunities that we could develop over time.

And we'll obviously announce them once they're generally available.

And our next question comes from Mark Marcon of R. W. Baird.

Peter, my heart goes out to you, hope for all the best and a speedy recovery.

And obviously, a terrific quarter here.

I would like to come back to just the pace or the sequential pattern in terms of revenue going from Q4 to Q3.

It seems like it's a slightly bigger pullback sequentially than what we've seen during the past and obviously, we still have the ACA.

Was the ACA contribution a little bit greater this year in terms of the 1095 filings or anything specific?

So I think just take a step back, from an ACA perspective, we don't charge specifically for the forms.

So we charge on a per employee per month basis.

And it's really part of us being able to keep the customer in compliance with ACA.

And so from that perspective, there's no form fee impact during the quarter.

And no, we haven't changed what we think the impact is for the year, still 7% to 8% for the fiscal year for ACA.

Okay.

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

I would say there is really not necessarily kind of a big call out.

Overall, I think last quarter we guided to 24.6% or 24.5%, roughly.

And this quarter, we're guiding at the midpoint to 23%.

So I'm not sure our guidance is that different from one quarter to the next.

I understand that we overperformed this quarter.

So sales had some good momentum that drove that level of overperformance.

But we're in the middle of this quarter.

So we've got to sell, we've got to service and we've got to implement the customers at this point in time.

So we feel comfortable with the guidance that we gave with the 23% midpoint.

Okay.

And then with regards to just the new sales that you've been getting, can you talk a little bit about just the characteristic of the clients?

Are they still broadly concentrated in that 100, 120 employee range?

Or has there been any sort of noticeable change?

Yes.

So I would say that our average size customer has not changed materially.

So I think we talked at the start of the fiscal year being about 120 employees being our average size customer.

We would absolutely be very much in that range still today, and we'll probably give you a better update at the end of the fiscal year.

But no real change in terms of market focus for us.

And our next question comes from Trevor Upton of Pacific Crest Securities.

Peter, I just want to echo everyone else's comments, my thoughts and prayers are with you.

We talked about the broker channel stabilizing.

Can you comment on if you've seen the same stabilization from the in-house channel?

Yes.

I think in-house was a little bit less of a surprise for us.

We saw in-house peak to get to about maybe high teens.

So think of that a little less than 20% of all the new business that we brought on at its peak.

Prior to that, it was really more in the mid-teens.

And so we've seen that kind of return back to historical levels.

I think that was something that we would have anticipated.

We didn't necessarily think that was going to continue.

So that has been the case, really, throughout this fiscal year.

Perfect, great.

And then you previously also discussed the ability to ramp the inside sales team.

You commented that you haven't done that this past quarter.

Any change in your thoughts around building that opportunity out?

Yes.

So I think the question about inside sales always comes back to selling more back to the client base.

And I think our view is we will continue to sell more back to the client base gradually over time.

And it will really be a combination of our outside sales reps will do some of that.

And then we'll also have an inside sales team that will also be kind of focused on that.

And so I think this year we've probably done a little more of that than we did last year and same thing the year before.

So we'll continue to do a better job selling back to our clients as our product portfolio continues to expand.

Great.

And then just my last question.

Do you have any thoughts on -- kind of initial thoughts on fiscal '18?

Yes.

So I would say we're early in the planning process.

So we typically don't want to give guidance at this stage.

We'll give our full guidance last -- or next quarter, obviously.

I think you can look back at the last 3 quarters and get a sense of where we're thinking the guidance has been.

This is a run rate business, it's a recurring model, as you know.

So I would look at the guidance that we've had for the last few quarters, and that probably gives you at least a little bit of insight in terms of how we're thinking.

And our next question comes from Kash Rangan of Bank of America Merrill Lynch.

This is [Shankar] on behalf of Kash.

Peter, my thoughts and prayers are with you.

Great quarter, but many questions have been asked, so I just want to like focus on a high-level question.

In the past, the customers, on a yearly basis, you have the customers growing at like mid-teens if you exclude ACA, and then your ARPU growth is around the low to mid-teens.

And if you look at Q3 performance and then your guidance for Q4, can you give some color on how that's progressing, plus or minus?

Sure, yes.

So we typically give you the unit growth and the customer counts at the end of the fiscal year.

But if you track back over the last several years and you take out ACA contribution, then we're typically getting, call it, roughly 60% of our revenue growth from units and maybe 40% from ARPU.

It's a little higher or a little lower than that depending on the year that you're looking at.

So I wouldn't tell you that, that roughly that ratio is kind of where we would kind of expect to land.

Nothing different happening there.

Okay.

And if -- so on the broker referral of 25%, in the past, you have said the range is anywhere from like 25% to 30%.

So it's actually like now around 25%, but can you talk about what are the catalysts that you think would get it up to 30%, assuming excluding ACA-related stuff.

Is there anything that you're hearing from the channel which you think that can accelerate through the year?

So taking a step back, we've historically given you a range of 25%-plus.

And that does mean that it's kind of in this more 25% to 30% range.

And then if we can consistently hit that next milestone, like 30%, then we'll potentially up the range.

So it is 25%-plus, and so frankly, it's closer to 30% than it is 25% today.

So it is actually fairly consistent with where we were historically.

I think the trends in the broker channel, more importantly, are still strong for us.

Brokers are certainly trying to get more involved from a technology perspective.

They have got a lot of changes in their business in terms of legislative changes and commission pressures and they're looking to be more consultative with their clients.

And so the opportunity to work with Paylocity really allows them to have influence over how the customer is using our platform, they can be more consultative using our broker portal.

So we think we've got a great value proposition for the broker and we continue to bring on new broker relationships and get deeper into the existing client base of our current broker partners.

And our next question comes from Patrick Walravens of JMP Securities.

This is actually Natasha on for Pat.

Peter, wishing you the best of luck with your recovery there.

So I have a couple of questions.

First off, how would you characterize your overall tone of business?

And second, has your segment in the market gotten any more competitive and what changes are you seeing there?

Sure.

So the second part first.

I would tell you that, competition-wise, we're still seeing the same players that you would expect us to.

We're getting the business from the same sources.

It's always been competitive in our business.

So rarely do we get into a deal where we're the only player involved.

There's always the incumbent and sometimes there can be a couple of other people involved.

So it's certainly competitive.

As we grow and as others in our space grow, we'll start to see each other a little bit more frequently.

So I think it gets a little bit more competitive over time, but nothing worth calling out from that perspective.

And then the first part of your question was?

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

Yes.

I think I'd go back to my earlier comments around things are starting to normalize and steadily improving from what I would think was less activity than we expected the first 6 months of our fiscal year.

And our next question comes from Abhey Lamba of Mizuho Securities.

This is Parthiv on for Abhey.

And Peter, I'll add my thoughts and wishes for you.

Can you guys comment on quota carrier performance during the quarter relative to plan?

And as you guys begin planning for next year, can you give us any directional color on how freshmen and senior quotas are trending?

Sure.

So I would tell you that we didn't expect at the start of the year to see this level of retreat in the broker channel.

And so I think our expectations at the start of the year were frankly a little bit higher, and I think we were very upfront about that when we reported our second quarter and letting you know that.

So when we look at the year as a whole, we would not be able to reach those kind of original expectations that we had.

However, as we start looking at the trend, which I think is very important, we're starting to see momentum building in the sales force.

We're seeing year-over-year improvements when we look at that productivity from what we saw in the first 6 months of the year.

Okay, got it.

And I wanted to follow up with the initiative around solution consultants.

Any update there or learnings from the past couple of quarters since you started incorporating that into your sales motion?

Yes.

So if you go back historically, we leverage solution consultants maybe a little bit more selectively for the larger, more complex deals.

And we were able to observe a higher close ratio when we had them involved.

So at the start of this fiscal year, we expanded the solution consultants, I think we more than doubled them.

And we got them involved in many more presentations.

And so that has been a positive experience for us as a whole.

I think over time, we would love to be in a position where we can have solution consultants involved in virtually every deal.

And so that has worked well for us.

We'll continue to expand that group and involve them as much as possible.

And when you really step back and think about it, the platform gets -- continues to get a little bit more complicated as we add components to it, and their knowledge about how customers can gain efficiencies using our entire platform can really be helpful in the sales process.

And I'm showing no further questions at this time.

I would like to turn the conference back over to Steve Beauchamp for any closing remarks.

Well, I'd like to thank all of you for your interest in Paylocity and all your questions today.

I also would like to thank you for all of your well wishes, thoughts and prayers to Peter.

And I know he certainly appreciates it and it's great that we've got him here today on the call.

Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference.

This does conclude the program.

You may all disconnect.

Everyone, have a great day.