Paylocity Holding Corp (PCTY) 2017 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Paylocity Holding Corporation Fourth Quarter 2017 Fiscal Year Results Conference Call.

(Operator Instructions) And I would now like to introduce your host for today's conference, Mr. Ryan Glenn, Director of Finance and Investor Relations.

Sir, you may begin.

Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter and full fiscal year 2017, which ended on June 30, 2017.

I'm Ryan Glenn, Director of Finance and Investor Relations; 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 we -- beginning, we must caution you that today's remarks, including statements made during the question-and-answer session, contain forward-looking statements.

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

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

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

We do not undertake any duty to update any forward-looking statements.

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

We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission.

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.

In regards to our upcoming conference schedule, Steve and I will be attending the Deutsche Bank Technology Conference in Las Vegas on September 12.

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

Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2017 year-end earnings call.

We completed fiscal year 2017 with total revenue growth of 30% and total recurring revenue growth of 31.1%.

We reached a significant revenue milestone as we crested $300 million in total revenue for fiscal 2017.

Total revenue growth for the fourth quarter was 27.1%, which exceeded our guidance and was driven by a strong quarter of new sales.

We also made significant progress in moving towards our long-term adjusted EBITDA goal of more than 20% of revenue.

We have consistently expanded adjusted EBITDA since our IPO in March 2014 and finished fiscal 2017 at 18.7% of revenue versus 12.3% of revenue in fiscal 2016, a 640 basis point improvement.

Our growth formula continues to be driven by adding new clients to our platform and selling more products to each client.

We increased our total clients by 16%, finishing fiscal 2017 with 14,550 clients compared to 12,500 at the end of last fiscal year.

Our average client size remains at approximately 120 employees as we focus on delivering the leading HCM software and service to the mid-market.

We increased average recurring revenue per client by 13% to $19,800 from $17,600 last fiscal year, primarily by selling more products such as recruiting and expense to new clients.

We also experienced some success in selling additional products back to the client base, and we will continue to gradually expand those efforts over time.

Broker referrals continue to be a key sales driver, representing more than 25% of our new business revenue for fiscal 2017.

As a reminder, broker referrals peaked at almost 40% in the second quarter of fiscal 2016 as clients rushed to implement ACA, with referrals then decelerating during the first and second quarter of fiscal 2017, settling in at our pre-ACA historical levels the past 2 quarters.

Brokers continue to feel competitive pressure by new technology entrants and traditional payroll providers and are leveraging the strength of our HCM platform, our broker portal and broad data integration capabilities to deliver clients a modern technology experience, combined with a consultative approach towards employee benefits.

We continue to invest in our sales force by adding new sales reps, solution consultants and managers while, at the same time, investing in training initiatives and marketing programs.

We have expanded the sales force by 25% this year from 205 sales reps in fiscal 2017 to 257 sales reps in fiscal 2018, and I'm pleased we are fully staffed to this number.

Being fully staffed as we enter the fall selling season is a very important milestone to position us for a good start to the year.

I also recently had the opportunity to spend time with a number of our experienced sales reps from across the country at some of our advanced training sessions.

I received very positive feedback on our investments in research development and the impact it is having on our competitive position in the market.

We increased our investment in research and development in fiscal 2017 by 22.4% when you consider what we expensed and capitalized.

Continued investment in research and development positions us to extend our industry-leading platform by introducing new products such as recruiting and expense, which helped us increase the per employee per year from $250 to $285 in fiscal 2017.

We remain focused on continued innovation and new product introduction in an effort to surpass the $300 per employee per year milestone in fiscal 2018.

We recently launched our latest offering, the Compliance Dashboard.

The Compliance Dashboard extends the existing compliance capability offered with our ACA solution by adding new capabilities to be proactive with aspects of compliance such as required sexual-harassment training, work authorization documentation, policy acknowledgment and electronic signature collection.

Although the Compliance Dashboard does not directly add to our incremental per employee per year opportunity, it does extend the value proposition beyond ACA compliance and positions Paylocity to help clients manage future legislative changes that occur frequently at both the state and federal level.

In addition to launching new modules, we continue to invest in research and development to enable our customers to automate more tasks, better appeal to multigenerational workforce and get more insight from their data.

Our customers now have even more opportunity to get ahead of unwanted turnover by using our Retention Risk Dashboard to gauge job-seeking behavior of select employees through a new feature called J-Score powered by Joberate.

Our larger customers can now further streamline payroll management with comprehensive view of pay schedules across the entire organization and an ability to drill into current and future check dates to assess progress against submission deadlines.

Additionally, we released a new modern take on the manager scheduler to increase supervisor productivity and automated the integration of time-off requests with Office 365, Gmail and Slack.

Throughout fiscal 2017, our operations teams focused on delivering a world-class service experience to our nearly 15,000 clients while, at the same time, implementing a number of new initiatives that will position Paylocity for greater scale as we continue to grow.

Clients continue to rely on Paylocity for consultation and advice, making service an important part of the value we deliver.

This combination of service and technology allowed us to, once again, deliver revenue retention of greater than 92% for fiscal 2017.

We are very proud of Paylocity's culture and are honored to have won a number of Best Places to Work awards this past fiscal year.

We have received very positive employee feedback from these surveys and on social media sites such as Glassdoor.

And as you may recall, earlier this year, we were honored to be named #14 Best Place to Work in the 2017 Glassdoor Employees' Choice Awards.

We believe strongly in creating a culture of transparency with open communication where people are empowered to make a difference and advance their career.

I would like to thank our more than 2,000 highly dedicated employees across the country for all of their efforts this past fiscal year.

Let me now turn the call over to Ryan to discuss our financial results in more detail.

Thanks, Steve.

Turning our attention to the financial results.

Total revenue for the quarter was $76.1 million, which represents a 27.1% increase from the same period last year.

Total revenue for the year was $300 million, up 30% from last fiscal year.

For the fourth quarter, our total recurring revenues of $73.4 million was up 27% from the same period last year and represented 96% of our total revenue.

Recurring fees were up 26.6%, while interest income increased by $0.4 million or 53.9%, primarily as a result of our client growth and balance increases, while we also saw an increase in average interest rates during the quarter.

For the year, our total recurring revenue of $288.4 million was up 31.1% and represented 96% of our total revenue.

Implementation services and other revenue was $2.7 million for the fourth quarter, up 30.6% from the same period last year.

Implementation services and other revenue was $11.6 million for the year, up 9.1% from last fiscal year.

Adjusted gross profit in the fourth quarter was $47.1 million, representing a gross margin of 62% as compared to $35.6 million or 59.5% in the fourth quarter of 2016, an improvement of 250 basis points.

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

Adjusted gross profit for the full fiscal year was $189.3 million, representing a gross margin of 63.1% as compared to $141 million or 61.1% from the prior year, a 200 basis point improvement.

Our adjusted gross profit on recurring revenues was $54.1 million or 73.7% in the fourth quarter, up from $41.5 million or 71.9% in the prior year, a 180 basis point improvement.

Adjusted recurring gross profit was $214.8 million or 74.5% for fiscal year 2017, up from $161.2 million or 73.2% in the year prior, a 130 basis point improvement.

We continue to invest in research and development.

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

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 $10.4 million or 13.7% of revenue in the fourth quarter compared to [$9.6 million] or 16.1% in the year-ago quarter.

Full year research and development investments were $39.4 million or 13.1% of revenue compared to $32.2 million or 14% of revenue in fiscal year 2016.

On a dollar basis, our investment in total research and development increased by 22.4% in fiscal 2017 when compared to fiscal 2016.

On a non-GAAP basis, sales and marketing expenses were $19 million or 25% of revenue in the fourth quarter as compared to $16.2 million or 27% of revenue in the same period last year.

For the full year, sales and marketing expenses were $70.9 million or 23.6% of revenue as compared to $57.3 million or 24.8% of revenue in the prior year as we continue to operate in our long-term target of 20% to 25% of revenue.

On a non-GAAP basis, general and administrative costs were $12.6 million or 16.5% of revenue in the fourth quarter as compared to $10.8 million or 18.1% of revenue in the same period last year, a 160 basis point improvement.

Full year general and administrative costs were $46.5 million or 15.5% of revenue as compared to $38.4 million or 16.6% of revenue in fiscal 2016, a 110 basis point improvement.

We continue to be pleased by our ability to consistently leverage general and administrative costs on an annual basis as we steadily move closer to our long-term range of 10% to 15% of revenue.

Our adjusted EBITDA was $11.5 million or 15.1% of revenue for the quarter versus $3.3 million or 5.4% of total revenue for the year-ago quarter, a 970 basis point improvement.

Our adjusted EBITDA for the year was $56.2 million or 18.7% of total revenue versus $28.4 million or 12.3% of total revenue in the year prior, a 640 basis point increase.

On a dollar basis, our fiscal 2017 adjusted EBITDA increased by nearly 100% over fiscal 2016.

Over the past 2 fiscal years combined, we have realized over 1,300 basis points of leverage in adjusted EBITDA, and while we do not forecast this level of leverage going forward, we continue to be confident in our ability to enter our stated range of 20% to 25% of revenue in the future.

For the fourth quarter, non-GAAP net income was $5.1 million or $0.09 per share based on 54.5 million pro forma diluted weighted average common shares outstanding.

For the year, non-GAAP net income was $36 million or $0.67 per share based on 54.1 million diluted weighted average common shares outstanding.

Briefly covering our GAAP results.

For the quarter, gross profit was $42.9 million, operating loss was negative $3.4 million and net loss was negative $3.8 million.

And on a full year basis, gross profit was $176 million, operating income was $7.3 million and net income was $6.7 million.

We continue to be pleased with the leverage we have been able to drive in our business model, with fiscal 2017 being our first full year as a public company with GAAP net income.

In regards to the balance sheet, we ended the year with cash and cash equivalents of $103.5 million.

From a cash flow perspective, we generated $62 million in cash from operating activities in fiscal 2017 as compared to $33 million for the prior year, an 89% increase.

Purchases of property and equipment were $21.3 million or 7.1% of revenue in fiscal 2017, which includes builds-out related to the first phase of our new office space in the Chicagoland area.

As noted on our last earnings call, we're expanding into a new Boise office, and we'll continue to phase into additional space in Chicagoland.

As a result, we may see purchases of property and equipment trend towards the high end and possibly slightly above the 6% to 7% of annual revenue we have historically targeted.

Finally, I'd like to provide our financial guidance for the first quarter and full year of fiscal 2018.

I would note that we have not factored in any potential future federal reserve interest rate increases (technical difficulty).

For the first quarter of fiscal 2018, total revenue is expected to be in the range of $80.3 million to $81.3 million or approximately 24% to 25% growth over the first quarter of fiscal 2017.

Adjusted EBITDA is expected to be in a range of $12 million to $13 million, and non-GAAP net income is expected to be in a range of $5.5 million to $6.5 million or $0.10 to $0.12 per share based on approximately 55 million diluted weighted average common shares outstanding.

And for the fiscal year 2018, total revenue is expected be in the range of $368 million to $370 million or approximately 22% growth over fiscal 2017.

Adjusted EBITDA is expected to be in a range of $71 million to $72 million, and non-GAAP net income is expected to be in a range of $43 million to $44 million or $0.78 to $0.80 per share based on approximately 55 million diluted weighted average common shares outstanding.

In summary, we are very pleased with our operational performance during the fourth quarter and full fiscal year 2017.

I would now like to turn the call back over to Steve before we begin the Q&A session.

It is with a heavy heart that we announce that Peter McGrail passed away last week.

Peter's life was taken too early.

He is survived by his wife, Agnes; their 4 children, Caitlin, Mary, Thomas and Audrey; and, of course, his entire Paylocity family.

Peter left an indelible mark on all that knew him.

His passing leaves each of us with a great void but great memories as well.

As CFO, Peter played as big a role as anyone in making Paylocity the company it is today.

He was instrumental in taking the company public in 2014 and was passionate about driving a learning and development culture across our organization.

We will always remember his wisdom, willingness to help anyone, genuineness and his friendship.

Operator, we are now ready for questions.

(Operator Instructions) Our first question comes from the line of Justin Furby with William Blair & Company.

And congrats on the quarter and, certainly, my thoughts and prayers to Peter's family and to all of you.

He'll certainly be missed.

I wanted to start, I guess, Steve, with you, and I was hoping you could give us a feel for rep productivity trends that you saw this past year, both with your mature reps and then the new reps that joined a year ago.

And, I guess, in terms of the new class that just came onboard, can you give a sense for the mix of sort of industry people versus those that are outside industry?

Yes.

So I think kind of recounting the year, we had a little bit tougher start to the year than what we had expected as we saw broker referrals return back to those normal historical levels but definitely gained a little bit of momentum in the back half of the year, finishing with a very strong fourth quarter.

So I was very happy with seeing the comeback that we had throughout the fiscal year.

In terms of rep productivity, what I'd tell you is there's no real big shifts, whether it's experienced or newer reps, from what we've seen historically.

So we're still seeing the same type of mix, whether it's from our most experienced folks or some of our the newer folks that we've brought on.

And then we really don't necessarily have a different process to track somebody from the industry or someone that had industry experience at some point in their career versus some of the newer reps.

We've got a standardized on-boarding process and training process we really feel good about.

So, I would say, we've hired both experienced reps now as well as some reps with business experience but not necessarily industry experience.

So we feel really good about the hiring class that we brought on.

Okay.

And then, I guess, just on the unit growth that decelerated this year a fair amount.

Now I'm wondering what you think sort of medium term what the sustainable unit growth is.

And do you feel like to keep revenue growth at 20% or higher from here, does it require ARPU to become an even bigger weighting than the typical sort of 1/3 ARPU growth and 2/3 units?

Yes.

So I think the ratio hasn't changed a lot.

So on 30% revenue growth, we've maintained a pretty similar ratio.

I think the important point here is we don't task our sales organization with specific unit targets.

They typically would try to sell as much product as the customer needs upfront.

And so it's always easier to sell a customer more product than it is to go get a new unit.

So I think the incentives work where we're trying to maximize ARPU and then get the units that we need to hit the numbers that we're looking for.

So I think we look at it more on a mix basis.

And so I think to continue to grow above 20%, we'd like to keep a similar mix going forward.

Got it.

And then just one more, if I can, just on guidance in the -- I guess, the philosophy this year.

Last year, you guys set out a number for the full year, and you had the broker channels flow quite a bit faster than you thought.

And you ended up beating that guide but maybe not as much as you'd hoped.

And I'm wondering if you feel like this year, for the fiscal '18 guide, if you've sort of used what you've learned from last year and maybe there are fewer risks to the guidance or how we should be thinking about it.

Yes.

I don't know if we've changed our guidance philosophy a lot.

I think what I would tell you, the larger you get, then it obviously gets a little bit harder to move the needle one way or another.

And so that's just really more economies of scale than anything.

And -- so we feel like we've gone through a pretty consistent process.

Our guidance actually is pretty similar to what it's been the last few quarters.

And so I don't think we've changed our philosophy.

And our next question comes from the line of Brian Peterson with Raymond James.

This is Vince Celentano on for Brian.

Steve, I was hoping you could remind us, how are you thinking about the longer-term growth drivers as it relates to customer count versus your average ARPU?

And then how should we think about that playing out over time?

And then, overall, what do you think's going to be the larger contributor to growth in fiscal year '18?

Sure.

Yes, so I think if you looked at our history, you will see that the units has always been a little bit larger than the ARPU in terms of the impact on our total growth.

Obviously, that was accentuated and -- or maybe a little different when you looked at the one year when ACA was first launched.

But if you extract that, we've always had more units than we have had ARPU.

And I think as you look forward, although we don't task specific unit goal numbers, I would tell you that we would expect to have a little bit more units than we would have ARPU growth as we look forward just based off the fact that, that's been consistent in our history.

Okay, perfect.

And then going back to the sales headcount.

I guess, how did that end up coming in versus your planned count for fiscal year '17?

And what are your expectations going into fiscal '18?

Yes.

So our process is we start kind of in the late -- or we start hiring in the spring, and we finalize our numbers kind of in late spring into early summer.

And those numbers are based off what our revenue targets are looking at and what our productivity assumptions are.

So we did target the number 257 reps or 25% revenue growth.

And we were pretty pleased to be able to get fully staffed going into this fiscal year, which is really important for us, because, as you know, the fall selling season is a pretty important time because we do get a higher proportion of our overall business in that January start time frame.

So that was the number we were looking for, and we were able to staff to that number.

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

And my condolences to you and also to Peter's family.

A question on the brokers.

With the uncertainty around the Affordable Care Act for the last 6 months or so, I'm surprised to see that the broker mix actually went back down.

But maybe from a qualitative perspective, was there much of a change in brokers, I guess, coming to you in the level of interest in bundling your product with their services?

Yes.

So I would just kind of recast in terms of how we've guided for brokers.

So brokers, when we went public, were more than 25% of our revenue, and that's a more than number that we give.

We increased that more than number to 30% plus as ACA was kind of entering into the market, and we also indicated that, that actually peaked in the high 30s.

And so what we saw these last 2 quarters is that it returned to that 25% plus, which is what it had been historically.

So I wouldn't say -- it certainly had gone down from the front part of the year but it is not down versus where we've been historically.

It's very consistent.

Okay.

And then in your script, you mentioned some upselling to the base as part of the ARPU growth.

How much is left to upsell?

Or how early are you in that process?

Clearly, your focus will be on adding new units, as you just mentioned before, but maybe talk about the mix as it stands and what your target is for the next couple of years.

Sure.

I think our view is that we would still see new client sales and selling new clients more of our products as our primary revenue driver.

I think ACA created an opportunity for us to start selling some back to our client base.

We staffed a small team with that.

We've gradually expanded that.

We've also seen some of our sales reps as we introduce new products being asked about those from our clients, and certainly, we want to be able to help clients as we continue to introduce new products.

So I think, naturally, we would just see that gradually grow every year but not necessarily be the driver of revenue, just be additive.

And our next question comes from the line of Ross MaCalin (sic) [Ross MacMillan] with Royal Bank of Canada.

And my condolences as well to the Paylocity team and Peter's family.

Steve, I had 2 questions.

First, obviously, the average rev -- recurring revenue per client is mostly driven by sales of more modules into new customers.

But as the base gets bigger, it clearly gets harder to drive the same percentage change in that.

So I'm just curious as to whether -- as we look at fiscal '18, you think selling back to base is going to be significant enough to augment that so that you could, call it, maintain above 10% recurring revenue per average customer growth.

Yes.

I would tell you, we don't necessarily task the sales force on an inside sales back to the client base versus outside.

We have a small team that's dedicated to that effort.

What I'd tell you is that small team will not necessarily drive the needle.

For us to really shift our sales force, we'd have to get much more engaged with our customers, which is not something that we're necessarily focused on.

It has happened more over time as the base has gotten bigger.

So our view is this trend will just continue, and our primary driver will still be new sales to new clients.

Okay, that's helpful.

And then just on productivity, I guess, measured by the number of new customers signed per quota-carrying rep in the last 12 months, that was obviously down maybe more significantly than was seen, but we know also that the first 2 quarters of the year were difficult from a comp standpoint and that kind of [pushed] ACA air pocket.

Would you expect that metric to be a bit better in fiscal '18 just because you're past that tough comp, past that air pocket?

Yes.

I think productivity per sales rep is something we look at.

We're primarily focused on average revenue per sales rep that they sell versus the number of units.

I think it really just depends on the mix.

As we continue to add more product and we get higher penetration rates, then the reps can actually sell a little bit less units and get more revenue per unit and still have productivity.

So I think the way we think about that mix is as long as we're getting the average productivity we're looking for, it doesn't really matter to us too much.

And if they sell 1 less unit but a lot more product, we're fine with that.

That's great.

Maybe just one last one.

Any product initiatives that we should be aware of as you think about fiscal '18 in the same way that you had some major product launches like expense [recruiting] in fiscal '17?

Yes.

So what I would tell is we don't preannounce product availability, and until we actually have it in the marketplace.

You'll see in my prepared remarks, I indicated that we feel confident this fiscal year, we can get ourselves above the $300 per employee per year.

So we certainly have some new products in development now, and we will announce those as soon as they're generally available.

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

This is Ken Wang on for Corey.

First off, I'd just like to express my condolences to Peter's family as well as the team at Paylocity.

So just wondering, have you seen any changes in competitor behavior over the past quarter?

As it become any easier or more difficult to win customers away from competitors?

Yes.

I would say beyond the past quarter, I would say we haven't seen a whole lot of competitive change this past year.

We obviously got a little less referrals in the front half of the year versus last year from brokers, but that really wasn't necessarily a competitive dynamic.

So we're seeing the same amount of business from the large traditional service bureaus that we've gotten historically, and then we continue to see regional competitors most significantly next.

And so I wouldn't say anything has really changed.

Okay.

And just from a salesperson hiring perspective, any change in competition there or difficulty hiring?

No.

I would just say, as we hire more reps every year, certainly, finding talent is always one of the key challenges that we're focused on.

We do actually recruit all of those sales reps ourselves.

We've got a pretty large internal recruiting team, and they are working prospective sales reps throughout the year.

That really allows us to execute a large number of hires in a relatively short period of time.

So I was pretty pleased with us being able to hit the target number of reps when we're adding more than 50 reps this year.

Perfect.

And just one last one from me.

Can you offer any color on potentially any expense items you expect to scale more in 2018?

Ryan, do you want to give some sense of where we might get the leverage and sense on what items we might get scale on?

Sure.

So I think you can see in our adjusted EBITDA guidance, we're guiding $71 million to $72 million.

So at this point, we're looking at kind of 60 to 80 basis points of leverage.

And I think the way we've talked about this is, on average, we'd expect, I think, about 200 basis points per year.

But coming off a year like fiscal '17 where we got over 600 and fiscal '16 where we also got over 600, we'll probably take some opportunities to potentially invest in certain areas as we want to make some of those investments given how quickly we've ramped specifically on adjusted EBITDA.

So I'm not sure we'd call anything out at this point, but I think the takeaway probably is just -- it's a balance for us between moving towards that profitability model while also investing back into the business.

And I think the only call out I would make is from a sales and marketing perspective, we got maybe a little bit more leverage because of the front half of the year this year than we would have expected, and we wouldn't certainly expect that on that line item going into next year.

Right.

And our next question comes from the line of Eric (inaudible) with SunTrust Robinson Humphrey.

Looking at your guidance for the top line growth, a little bit short of what consensus was thinking, so roughly low- to mid-20% top line growth.

But looking at the intermediate term prior to reaching your long-term goals with EBITDA margin targets, would you say the market is kind of guiding you guys along with your strategy to low- to mid-20% growth now that we lapsed the onetime issues of ACA?

So are we roughly at the new normal low- to mid-20% growth?

I would say it's hard for us to know that.

We haven't really kind of normalized growth.

You think about this year was 30% for us off of really tough compare with ACA prior.

And so now we're guiding to a -- midpoint's about a 23% revenue growth.

Our goal would be able to maintain 20%-plus revenue growth.

That's certainly part of our long-term model.

So the fact that we're guiding to 23% gives you a sense we're certainly closer to that target.

Okay.

Helpful.

And then on some of your newer products, expense management and recruiting, how are the adoption rates for -- or attach rates for new customers?

And are those some of the products that are being sold back into the customer base?

So, yes, when we have a new product introduction, we do introduce that back to our customer base.

And we certainly wouldn't want a customer not to know about a product that we may have available to them.

So that's certainly part of our process, and we do have some upsells back to our clients for those 2 products specifically.

We've been pretty pleased with both of those.

I would say recruiting and expense have got off to a great start for us.

We're seeing some penetration rates right in line with what we would have expected back to the new clients.

And one of the other thing I would tell you is we see a lot of customers looking for a pretty comprehensive platform and are buying it in a bundled fashion, and recruiting and expense are a key part of those bundles.

And our next question comes from Scott Berg with Needham & Company.

And, again, I would certainly extend my condolences to the Paylocity family.

Most of my questions have been answered, but one quick one on the financial side.

You had a pretty significant beat (inaudible) EPS.

So just curious to know, on the expense side -- expenses in the quarter, did any expense shift into the first half of next year?

Did those expenses kind of fall in line with your expectation?

So I think what I would say is as we got off to the start of the year, and we didn't quite see the referrals that we were looking for from brokers, we certainly kind of realigned our expenses in the front half of the year.

And then as we started to regain momentum on the back half of the year, we started the investment cycle again in terms of many of our teams to support the volume that you're looking for.

So you do certainly see a little bit of a lag that way.

And so I wouldn't say there's anything that pushed from 1 quarter to the next, it's just you're kind of catching up to the volume as it comes in.

I would feel we -- like we've got the right investments lined up in the guidance that we've provided for the year.

And our next question comes from the line of Siti Panigrahi with Wells Fargo.

I also extend my condolences to Paylocity family.

When I look at your Q4 sequential guidance and then sequential revenue decline, it's almost in line with your average, almost 15% to 16%.

But your guidance for Q1 implies a sequential increase of 6%.

That's kind of way below average of your -- of 10% and even last quarter -- last year Q1 around 9%.

So I'm wondering, is there anything that you are seeing in July that -- sort of any trends that you're seeing (inaudible) guide this way or is there some kind of (inaudible) relative to that?

So I would say -- I wouldn't highlight any trends, specifically.

That's kind of gone into that guidance.

We look at the year and then, obviously, we look at how we think the business is going come in throughout the year and then provide guidance based off of that.

But I think if your question is there some sort of more recent trend that has changed our thought process, then the answer to that would be no.

Yes.

I guess, the only thing that I would add is if you look at our quarterly guidance, I think, the last 3 quarters, we've been guiding kind of in this range, 22%, 23%, 24%.

I think if you do the math on Q1, it's 24% to 25%.

So the philosophy has been pretty consistent, I think, the last 3 or 4 quarters.

Okay.

And then -- and for the FY '18, for the full year, I know that you guys talked about almost 7% revenue contribution for ACA.

Have you baked in any kind of ACA contribution for this year?

Yes.

So what I would tell you is we have baked in what we think is a reasonable ACA contribution from this year.

One of the things that we've also done, in my prepared remarks, I talked about our compliance product where we're starting to extend the value proposition of a compliance tool beyond just ACA.

And so that product embeds ACA along with other capabilities for our customers from a compliance perspective.

And so I think it -- over time, our goal would be that we would have a compliance suite that people are paying for, which we think potentially derisks us as well from an ACA.

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

And we extend our condolences to the Paylocity family as well.

Steve, talking about your revenue guide for fiscal '18, you have a sales capacity increase of 25%, but your revenue (inaudible) expectations are 23%.

Can you talk about productivity enhancement or what type of kind of reduction in productivity are you baking in, in terms of your guidance?

And how should we expect to have the growth between recurring versus nonrecurring revenues next year?

Okay.

So we don't necessarily break out the nonrecurring versus recurring in terms of what our guidance is.

I think it's a little bit more complicated of a formula than just looking at the number of reps and then looking at the revenue guide.

So what I mean by that is it's a recurring business, so the amount of revenue sold last year affects as much as what you've sold this year overall.

In addition, the clients can grow a little bit.

There's a small pricing component to this.

So it's -- and then there's a loss rate.

And so the reality is you've got to sell on top of that loss rate.

So I think when you put all that formula together, you can't look just at what your revenue growth rate is versus the number of reps that you have.

I think, overall, from a rep productivity perspective, we didn't get the productivity we looked at the first half of last year.

We did get some significant improvements the back half of the year.

And we've tried to incorporate what we think is a reasonable assumption going into this year.

And we feel good about the recent momentum that we've gotten the last quarter.

Got it.

And some of your competitors have talked about using other channels such as accountants or some other means outside of the broker channel to enhance their reach.

Have you kind of considered some of those channels?

And are -- is some of that expansion baked into your plans for fiscal '18?

So we certainly look at other channel opportunities.

We feel like the broker channel most aligns to the customer segment that we're going after.

So with an average customer size of 120 employees, typically, the accounting channel or the bank channel, which other providers have gone after, brings in a much smaller client size than that 120-employee size.

So that's one that we certainly have looked at.

We just don't necessarily think that the market overlap would yield the same type of results at the broker channel.

So that's not necessarily a focus going into next fiscal year.

And our next question comes from the line of Brad Reback with Stifel.

Sorry if I missed this on the call earlier, but did you guys say what the average daily float was?

I don't know that we called it out specifically, but it was in the neighborhood of about $850 million to $900 million in the fourth quarter.

Great.

So, basically, a 25 bp increase there gets you another $2 million, $2.5 million on the top line?

So I think the way to think about that is you've got the right concept, but it doesn't necessarily layer in that way.

We have a large number of banking relationships that we then have to work with them to see what we can do in terms of realizing that rate increase.

It always takes a little longer for us to be able to get that rate increase in.

But the concept is the right one, which is if you're getting 25 basis points over maybe an extended period of time, you could potentially realize most of the benefit from that.

You just don't necessarily get it right away, takes a little bit of time for us to work each of our relationships out.

And our next question comes from the line of Mark Marcon with Baird.

First, my condolences as well to Peter's family as well as the Paylocity family.

Two sets of questions.

One, recurring gross margin looked like it was better than what we were anticipating.

Are you expecting -- was there anything unusual with regards to that in this particular quarter?

And would you anticipate that same level of scale coming through in the plans for the coming year?

Sure.

I would say there's nothing unusual.

As I called out a little bit earlier, we certainly started making more investments in the back half of the year to keep up with the volume that we were kind of seeing and probably didn't see all of that in that fourth quarter.

We see some of that happening in the first quarter, certainly would probably be the only real call-out.

We do try to focus on overall gross margin expansion every year, and so, certainly, part of the guidance that we have would imply some level of expansion next fiscal year.

Great.

And then which -- just from a sales perspective, 3 questions.

One is, which modules are you seeing (inaudible) attach rates with in terms of new sales now?

Secondly, from a competitive takeaway perspective, can you comment with regards to whether it's still ADP and Paychex in that order or vice versa?

And if there's anybody else that you're starting to gain traction relative to.

And then thirdly, as you go into the back half of this year, it sounds like you're all set for the fall selling season, but as we go into the back half of the fiscal year, what are you envisioning in terms of sales force expansion?

Yes.

So I think it's a little early for us to think about the sales force expansion on the back half of the year.

That's something that we would target post year-end.

That's obviously a pretty important time of year for us from a sales perspective.

I think on the first part of your question, which is, which modules are we selling the most, I would say we still continue to see clients buy payroll and HR in combination, add time and labor next.

But I would say we probably see, from a growth perspective, more growth in the benefits and talent management category.

That's been pretty consistent for us over the last couple of years.

And then from a competitive perspective, we still see ADP and Paychex in that order make up approximately 50% of our new business.

So no changes there.

And the only other change you might have from a mix perspective is, I think, we called it earlier in the year, that in-house had kind of gone down to its historical levels as well.

At peak, it was in the high teens, and now we see it more kind of in the mid-to lower teens.

But other than that, there's no real competitive call-outs.

And our next question comes from the line of Trevor Upton with KeyBanc Capital Markets.

And, again, I just want to add my condolences to the Paylocity team and Peter's family.

With respect to selling more products, are you seeing any change in either implementation times or sales cycles?

Yes.

No, I would say that we haven't necessarily seen a big change.

I think I highlighted a little bit earlier that we do see that customers are looking to buy more product.

They're looking for a fairly simplified pricing schedule to make that decision.

They like to make these decisions in bundles.

I think that's generally a very positive trend for us as we continue to broaden our portfolio.

Our implementation times have typically been kind of in this 3- to 6-week time frame.

And there's times where customers might want to schedule some of the other modules a little bit later, but if they're up for it, we can get them up pretty quickly.

So, no, we haven't necessarily seen any changes in implementation times.

All right.

And then just a quick -- another quick question.

Just payroll as a percentage of revenue, I know you called out that you kind of passed the milestone last year.

Do you have any update?

So last fiscal year, payroll was less than half of our overall revenue, which was a pretty significant milestone.

It's not one that we anticipate updating going forward, but I would tell you, payroll was less than it was last year as a percentage of our total revenue as we see more growth in the HCM modules.

And our next question comes from the line of Pat Walravens with JMP Group.

My deepest sympathies.

He was -- I'd say he's a consonant professional, and he never had an unkind word for me, which is -- we'll miss him.

My question -- yes, my question is big picture, which is, I think investors, they just wonder.

You guys are doing so well and so is Ultimate and Paycom and Paycor.

So how should we think about -- and presumably, this is coming at the expense of (inaudible) ADP and Paychex.

How long can this continue?

Just love to hear your big picture thoughts on that.

Yes.

So I think -- taking a big picture view of it.

It's still a very large market, dominated by 2 of the large traditional payroll providers where we have gotten half our business from.

And so with nearly 15,000 clients in a market with over 600,000 prospects, it's a pretty small penetration rate.

And so in-house is still a fairly large category, regional payroll providers still make up a fairly large category and then ADP and Paychex also have a significant number of customers.

And so we think the real macro trend here is clients are looking for an efficient, modern platform that really allows them to engage in a very much changing workforce.

And I don't think that trend is slowing down at all.

In fact, I think as the workforce gets younger, there's even more demand for a much more modern platform.

And because of that trend, we think that there's still a pretty significant runway in front of us.

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

I would like to return the call to Mr. Steve Beauchamp for any closing remarks.

Well I'd like to thank all of you for joining us and your interest in Paylocity.

I'd also like to thank you for all your kind words for Peter and his family.

They are deep in our thoughts, and he will definitely be missed.

Thank you very much.

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

This does conclude the program, and you may all disconnect.

Everyone, have a great day.