Peter McGrail - CFO Steve Beauchamp - CEO.

Justin Furby - William Blair & Company Terry Tillman - Raymond James Greg Roth - Northland Securities Nandan Amladi - Deutsche Bank Peter Levine - Needham & Company Jim Macdonald - First Analysis Securities Brad Reback - Stifel Nicolaus Natasha Asar - JMP Securities Scott Shiao - Bank of America Merrill Lynch.

Welcome to the Paylocity first quarter FY '16 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.

I would now like to hand the conference over to Peter McGrail, Chief Financial Officer. Please go ahead..

Thank you. Good afternoon and welcome to Paylocity's earnings results call for the first quarter of FY '16 which ended on September 30, 2015. I'm Peter McGrail, CFO and joining me on the call today is Dave 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, 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 this 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 these 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 first earnings call of FY '16. Let's start by reviewing a few highlights for the first quarter of the year. Total revenue for the first quarter was $45.1 million, up 45% year over year, with recurring revenue increasing 45.4%.

Strong performance by our sales organization, along with clients beginning to adopt our Enhanced ACA solution, were the key revenue drivers in the first quarter.

Adjusted EBITDA of $3.3 million for the first quarter increased by $2.9 million versus the same period last year, based on the growth profit improvements and the natural scale in our business model.

With the strong start to the fiscal year, we revised our FY '16 guidance to forecast positive non-GAAP net income between $2 million and $4 million or $0.04 to $0.07 per share for FY '16.

Achieving meaningful non-GAAP net income marks an important milestone and demonstrates the inherent strength of our business model, as we continue to capitalize on the opportunity in front of us. We recently held our annual client conference in Chicago, with record attendance of nearly 800 users.

Feedback from clients was very positive, as we shared our product road map and engaged several industry experts on a wide variety of topics, allowing attendees to choose from more than 30 different breakout sessions, across all aspects of human capital management.

Our sales team had a very good start to the fiscal year, building momentum as we enter our fall selling season. We continue to experience an increased level of interest from our broker partners, as the ACA deadline approaches for 2015 filing.

We're now getting more than 30% of our new business revenue referred to us from the broker channel which includes health insurance brokers, 401k advisors and third-party administrators. The increased level of referrals from brokers is also driving a higher percentage of new clients from in-house and on-premise software.

We believe that the complexity of ACA legislation is the primary driver behind a greater number of in-house clients evaluating alternatives. Although we're still primarily focused on landing new clients, ACA also represents the first product we have focused on selling back to our current clients.

The majority of our current clients will be required to file form 1095 this calendar year and therefore we're marketing our ACA products to current clients above the 50 employee threshold.

We're introducing clients to ACA via a variety of marketing mediums, including a small inside sales team, online webinars and messaging from the clients' dedicated account managers.

We have been very pleased with our initial results, as clients are gravitating towards our Enhanced ACA offering which includes both form production and an interactive dashboard that will allow them to proactively manage employee events throughout calendar 2016.

As a reminder, the Enhanced ACA offering is a full-featured compliance tool, operated on a per employee, per month basis, versus our essentials offering which is billed one time per year, based on the number of 1095s produced.

The addition of ACA Enhanced, along with continued improvements to our unified suite of products, increases the price point of our complete offering to $250 per employee, per year.

We continue to be pleased with the results of our investment in research and development, as we've expanded our total product portfolio from $200 per employee, per year at the time of our IPO in March of 2014, to $250 now, 18 months later.

We recently highlighted our product road map at our annual client conference, emphasizing our continued focus on delivering innovative HCM solutions for the mid-market. Key product themes from the client conference, in addition to ACA, included both usability and mobility.

The announcement of a new updated user interface, across our entire platform, garnered significant excitement from the attendees. Paylocity's mobile app continues to gain traction, with the introduction of additional supervisor capabilities, increasing unique users to 35,000 per day.

Our product development team had the opportunity to host clients in 10 different connection zones, sharing our vision and soliciting ideas directly from users. This experience reinforced our belief that continued investment in our platform will provide both differentiation and additional revenue opportunities.

To capitalize on this opportunity, we continue to increase our investments in research and development, as total R&D spend increased by 55% this quarter, versus the same period last year, when you consider what we expensed and capitalized.

The combination of delivering a differentiated platform, with high touch client service, has allowed us to continue posting 92% plus revenue retention. ACA represents another opportunity for us to demonstrate the value of our service model, as we have trained 95% of our service and implementation teams to be ACA experts.

Based on demand, we have begun to increase internal resources, focused on helping clients and their brokers configure the ACA Enhanced solution. Clients have been very appreciative of the proactive approach and expertise we've been able to provide, as they approach the ACA deadline.

As part of our ongoing effort to expand operational capacity, we recently selected Boise, Idaho as a new service center location. We expect to start scaling that location in calendar year 2016 and are excited about the opportunity to bring additional talent on board. We will continue to expand service centers in both Chicago and Orlando.

However, the addition of Boise will provide greater coverage for our West Coast client base. Overall, I'm very pleased with the first quarter performance and even more excited about the talent we have been able to attract and retain as we grow the business.

I would now like to turn it over to Peter, to review our financial results in more detail and provide guidance for the second quarter and FY '16..

Thanks, Steve. Let me walk through the results and provide more detail. Total revenue for the quarter was $45.1 million which represents a 45% increase from the same period in the prior year. For the first quarter, our total recurring revenue of $42.9 million was up 45.4% from the year-ago quarter and represented 95% of our total revenue.

As Steve mentioned, this growth was attributable to the tremendous performance of our sales team during the quarter, as well as good initial results from the adoption of our ACA Enhanced solution. Recurring fees were up 45% in the quarter and interest revenue was also up 45% year over year, primarily as a result of balance increases.

Implementation services and other revenue was $2.2 million for the first quarter, up 38% from the year-ago quarter. Within our implementation services and other revenue category, payroll start-up revenue was particularly strong.

We're also pleased to report that our annual revenue retention rate which is always calculated on a trailing 12 month basis, remained above 92%, as it has for several years. As we've noted in the past, we believe this is Best-in-Class for our segment. Our approach to ACA represents a wonderful example of our ongoing commitment to our clients.

As Steve noted, we're proactive in contacting our clients to help them navigate this complex legislation and we will continue to add resources, as adoption of our solution increases. The combination of high recurring revenue percentages and high retention rates provides significant visibility into our future operating results.

Adjusted gross profit in the first quarter was $26.5 million, representing a gross margin of 58.8%, as compared to $16.9 million or 54.3%, in the first quarter of 2015, a 450 basis point improvement.

This improvement in adjusted gross margin was a combination of the reseller acquisition completed last April, along with continued scale in the business, as we increased penetration rates on higher margin modules.

We view our adjusted recurring revenue gross margins as the best indicator of our overall long term margin opportunity, as we generate these margins on greater than 94% of our revenues.

Our adjusted gross profit on recurring revenues was $31.1 million or 72.4% in the first quarter, up from $20.4 million or 69.1%, in the year-ago quarter, a 330 basis point improvement. As we noted at the end of our last fiscal year, we're now operating within the range of our long term model of 70% to 75%.

Again, this improvement was a combination of the reseller acquisition completed last April, along with the continued scale on the business, as we increase penetration rates on higher margin modules. We continue to invest in research and development.

As Steve noted, we now have the ability to provide $250 per employee, per year of product offerings, up from $200 at the time of our IPO just 18 months ago. In addition to new modules and capabilities, we're 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 $6.8 million or 15.2% of revenue in the first quarter, compared to $4.4 million or 14.2% of revenue, in the year-ago quarter.

On a non-GAAP basis, sales and marketing expense was $11.5 million or 25.5% of revenue in the first quarter, compared to $8.2 million or 26.3% in the same period last year. We're especially pleased with our increasing sales force productivity.

We have grown our recurring revenues at 40% plus for several years, while growing our sales force at approximately 30% on an annual basis.

The continued cultivation and expansion of our unique broker referral channel has contributed to these productivity increases, with referrals from that channel accounting for greater than 30% of our new business revenue in the first quarter.

On a non-GAAP basis, general and administrative costs were $8.4 million or 18.6% of revenue in the first quarter, compared to $6 million or 19.4% of revenue in the year-ago quarter, as we continue to leverage our G&A costs following our IPO in March of 2014.

Our adjusted EBITDA which is only adjusted for stock-based compensation, was $3.3 million for the quarter versus $0.4 million for the year-ago quarter. Non-GAAP net income was $0.9 million or $0.02 per share for the quarter, versus a loss of negative $1.4 million or negative $0.03 per share, in the year-ago quarter.

Briefly covering our GAAP results, for the quarter, gross profit was $24.9 million, operating loss was negative $3.4 million and net loss was negative $3.4 million. In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $78.7 million.

Cash flows generated by operating activities were $3 million in the quarter, versus negative $0.2 million in year-ago quarter. This increase was the result of our increased non-GAAP net income in the quarter. Finally, I would like to provide our financial guidance for the second quarter and updated guidance for the full year of FY '16.

In the second quarter, total revenue is expected to be in the range of $48 billion to $49 million which represents 40% to 43% growth over the second quarter of last year. Adjusted EBITDA is expected to be the range of $1 million to $2 million.

Non-GAAP net loss is expected to be the range of negative $2 million to negative $1 million or negative $0.04 to negative $0.02 per share, based on approximately 51 million basic and diluted weighted average common shares outstanding.

For the fiscal year, total revenue is expected to be the range of $210 million to $214 million, an increase of $11 million from our previous guidance and representing 38% to 40% growth over the prior year. Adjusted EBITDA is expected to be the range of $16.5 million to $18.5 million.

Non-GAAP net income is expected to be in the range of $2 million to $4 million or $0.04 to $0.07 per share, based on approximately 54 million diluted weighted average common shares outstanding. In summary, we're very pleased with our performance during the first quarter of FY '16.

Highlighted by significant revenue growth, continued gross margin expansion and G&A expense leverage. We're also very pleased that we achieved net income on a non-GAAP basis for the quarter and are guiding to meaningful net income, on a non-GAAP basis, for the full fiscal year. One final note.

I will be attending the Raymond James fall investors conference in Boston on November 11 and the Needham SaaS one-on-one conference in San Francisco, on November 17. And Steve will be attending the Stifel Midwest one-on-one conference in Chicago, on November 12. Operator, we're now ready to begin the Q&A session..

[Operator Instructions]. Our first question comes from the line of Justin Furby from William Blair..

I want to start on ACA, Steve, I have got a few on it, actually.

I guess when you think about the impact to the business this quarter and going forward, do you think it is more positive, from the standpoint of the incremental product attach with the ACA Enhanced? Or is it more the bigger dynamic here, just that maybe there's overall unit or market activity going on?.

Yes, so I think ACA has a variety of impacts to our business. First of all, any time that you've got complexity for mid-market clients, they are looking for a provider to help them. So I think, from an operational perspective, having the ability to help our existing customers, I think, really helps demonstrate the value of our overall offering.

I think that's one positive. I think certainly a second positive is what I mentioned in my prepared remarks, that in-house clients are really evaluating their alternatives. And so from a new sales perspective, we're seeing a little bit increased activity. And then I think lastly is the fact that we have an ACA Enhanced product.

Certainly creates, potentially, additional incremental revenue opportunity. I think is important to note that we have both an Essentials product and an Enhanced product.

And the approach that we took with our Enhanced product is that we can automate a lot of the ACA setup for our customers, even if they are not using our time and labor or benefit module. And if you think about ACA, it requires data from time, benefits and payroll.

And so because we've taken really more of an unbundled approach, we're finding that our customers are really gravitating to that solution early on, as we're introducing it to them..

And I think the one question everyone seems to ask is, what happens when you lap this? And it's not something to worry about for several quarter, but it's something -- is there something we should worried about? Do you think demand could potentially soften a bit? Or is it no, because it is just so early, in terms of capturing share?.

Yes, I certainly think when it comes to our attraction and execution, from a sales perspective in the marketplace, that in-house is not a big category for us. So it has increased, but it has never been a big category. So we don't feel like that necessarily is a big impact. It just depends on our success with the Enhanced solution.

If we get a lot of adoption with our customers, on a per employee, per month, clearly, as we start to anniversary that, that might create a little bit more of a challenge. But we're still early in this process to be able to forecast that..

And then just one more on the margins. Peter, you talked about some of these attach modules having higher margins, versus maybe the traditional payroll business. Just curious -- and I know it's early -- but around ACA Enhanced. It seems like that one might require a bit more support, at least initially.

So would love thoughts around the margin implications with that product. And that's it and thanks and congrats..

I will start, Peter and then I will let you jump in. I think overall, one thing about payroll is, it is clearly a must-have process and it does take a fair amount of work to get someone set up. You've got to be able to produce these paychecks accurately.

And any of the other modules across the HCM don't necessarily require that same level of set up and frankly, don't typically require the same level of ongoing support, once someone is configured and up and running.

And I would say that's probably the case for most of the other things that we offer and I would say ACA would fall into that same category..

Yes, I would say early on, Steve, we've made some investments in ACA. Clearly, in my prepared remarks, I talked about the fact that we were helping our clients through this process. You would think, over time, they would become more educated in the process and we would be able to back off of that. So I agree, it is a good margin product.

But early on, we're assisting our clients through that..

And our next question comes from the line of Terry Tillman from Raymond James..

I guess Steve, in terms of the idea of, your sales force is off to a great start, you indicated earlier, in your prepared remarks. And it is about building national scale.

Could you give us an update, in terms of -- where are you, in terms of the national scale? Are there still meaningful parts of the country or regions, where you feel like you're underrepresented? And thus, some significant investment opportunities? Or your direct sales presence, plus your channel partners, are you starting to get to a point where you feel like you have at least enough breadth or coverage nationally?.

Yes, so if you go back to our expansion model, we originally started expanding by hiring the best talent anywhere that we could find them. And our first pass at that was really seeding all the major markets across the country. So we would add a rep to each of the individual major markets.

Clearly, now, with over 160 reps across the country, we have now gone back and added multiple reps into each market. I think from the -- it is easier to add additional reps to those markets than being the first rep in that market. So I really like the fact that we now have presence in all the major markets across the country.

We certainly feel like we can add reps to any market that we're in across the country. We're still early in this opportunity. We've got just over 10,000 clients at the end of last fiscal year, so that's less than 2% penetration, on a client basis. And therefore, adding reps to any of these marketplaces represents opportunities.

Important to note that we've historically been growing the sales force by about 30% per year. So we've been relatively consistent the last few years. And then when you add in the productivity increase that you get on top of that, from the sales force, then that's how we've been able to post these kind of numbers..

Okay. And I guess, if I wasn't mistaken, towards the end of last fiscal year, I think you all had some opportunities or opportunistic hiring on the R&D front. And you may have had some front end-loading of some of the additional engineers that were available. First, hopefully I've got that right directionally.

And if I do, is there anything that can be set in granite? Peter, you talked about the 50% plus growth, year over year, in R&D.

Does that do anything? Or does that pull forward the potential of a brand-new additional product to this year, that could further increase that PEPY? Or does it do something else, in terms of speed up some other sort of innovation on existing products?.

Yes, so I think, first of all, we do believe that investing in research and development, both from a differentiation and adding new modules, is really the key strategy, from a long term perspective. So we're very proud of having been able to increase the average per employee, per year product.

Not average, I should say, but the maximum per employee, per year production, from $200 to $250. And so when we make these investments in R&D, we target them to different areas of our application. Some of those opportunities are increased level of differentiation and then others are potential modules that we might add.

We don't make a practice of announcing modules ahead of time. So we've always got things at various levels of research, some in development, some being tested in the marketplace. But I think generally, the concept is the right one which is, if we can add some R&D resources, then that allows us to accelerate on out product road map.

And we got great feedback with the things that we were able to share with our clients, at the client conference..

Okay. And I guess I would be remiss if I did not talk about the service centers. Too bad, I guess, you didn't come to Atlanta, but I guess good for Boise.

How do I think, though, Peter, in terms of a major new service center coming online, is that going to have more of an impact in the FY '17 standpoint, from a cash flow perspective or CapEx? Or could that have some impact, as well, on COGS? Thanks..

So I would say, like any service -- any new service center, like Orlando when we brought on, will build into that service center. Will build into it necessarily somewhat slowly and learn the area. Learn how to hire in that area. And as far as CapEx and all those sorts of things, these would be natural factors in a growth Company.

You shouldn't see material changes in our COGS or any of our other expenses. This would just be the natural growth of a high-growth organization..

Yes and I would tell you that we picked that market because we thought we could get high-availability talent and talent is important across the organization. But going into a new service center doesn't mean we're going to add more people than we would have otherwise. So I don't -- it is not anything different, from a run rate perspective.

Clearly, there is some initial facility costs and so one. But that will fit into our normal capital profile..

And our next question comes from the line of Jeff Houston from Northland Securities..

This is Greg on for Jeff today. Just a few questions.

First, could you provide some more color on your referral network? What is the mix of companies that are referring your business? And are there new relationships you are targeting?.

Sure. So as a reminder, our referral network is independent 401k advisors, health insurance brokers, HR consultants, third-party administrators. And so these firms -- and they range in size to very small firms to regional firms -- operate in specific geographies.

Our sales reps then create relationships with the producers at these firms and then the firms or the individual producers, provide our sales organization referrals. These referrals close at a much higher ratio than if we were to enter into that sales opportunity in a different fashion.

So we just increased the amount of referrals we're getting from the channel, in aggregate and that comes from really two key methods. The existing partners are providing us more leads and referrals, in addition to the fact that we're adding new partners to the channel.

So the combination of both allowed us to increase the referral rate from 25% plus to now 30% plus..

And then I had one additional question.

Has there been any change in the average size of customers added in this quarter or in your pipeline?.

Yes, I would say we don't give any specifics, on a quarterly basis, in terms of customer size. I think the best color I could give you, as we're still focused on mid-market, 20 to 1000 employees, our customer has a little bit more than 100 employees. None of that has changed in the quarter..

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

So what changed in the profitability view for the year, compared to your initial guidance at the beginning of the year that we got? Was it just conservatism on your part, early in the quarter? Or has something fundamentally changed in the business. Obviously, the ACA module is something that you had not launched at the beginning of the year.

So were there some other factors you took into consideration?.

No, I actually don't think there are any other material factors. I think you've got it right. We saw some great sales performance from our sales group. We saw some -- certainly some interest in our ACA Enhanced solution.

And when we built those out in our modeling, as we went forward and built in the -- obviously, the necessary economics below the revenue line, these are the results we've projected..

And then a follow-up on the broker bookings. You've gone from 25% to over 30%. Your sales force is also growing at 30%, year on year and getting more productive.

If we look out and try to maybe project a year or two forward, what might that mix look like? Is there a particular mix you are targeting, for broker versus direct?.

Yes, so I think we've always had the goal, when we started really working this channel, now probably seven years ago, to be -- get to maybe 25% of our new business revenue coming from the broker channel. And then I think with the growth rate that we've posted the last several years, we're very pleased to be able to maintain that 25% plus.

So we're even more excited to see that at 30%. I would tell you that, as we grow, it will obviously be a challenge to keep that in that 30% plus rang. But if we were able to do that, that would be something we would be very proud of..

And our next question comes from the line of Peter Levine, Needham..

I'm in for Scott Berg. So just two quick questions. So what do you see changing, on the demand side? We have seen demand higher recently and is has been reflected in all the other HR Company reports.

So is this just a near-term issue? Or do you feel it is more sustainable?.

So I think, from a demand perspective, there's a couple things happening. I think from a long term trend, what is really happening is, companies are looking for technology that will allow them to automate a lot of their manual processes. That's going to allow them to get their supervisors, their managers, their employees engaged in a platform.

That's really the key for them to be able to automate these things. So I think that's the broader, long term trend that we're seeing across the market. And I think all of us in this space benefit from that, particularly those with a really easy to use, feature-rich software platform.

And so I think the second part of the trends that you see the marketplace is really ACA and the complexity that ACA is creating. Cut I don't necessarily see ACA as just a one-time event. If you think about it, you've got to then have employers with 50 or more file these forms.

But every single month, every week, as they add new hires, as people change jobs and positions, they've actually got to go into an application and be able to manage the ACA requirements. And so I think it does add some longer-term complexity to managing your workforce.

And so we've invested significantly in making sure that we've got a solution that will not only automate the form filing, but really ease the burden on them, as they try to manage these position changes, new hires, terminations throughout the year. So there might be a little bit of a bump from an ACA, because it's new.

But I think it is a trend that can last for a while..

And given the acceleration of demand, should we expect any changes in sales and marketing investments over the next two to three quarters, versus your original plan?.

I think we've tried to take into consideration our plan and our forecast overall and we've been pretty steady, in terms of what our sales and marketing spend has looked like. We certainly continue to invest in marketing opportunities, to drive the broker channel adoption. We've been pretty consistent around our headcount increases.

We won't make any decisions around headcount for next year, until we roll into the spring. So I would not say there's anything major that we would want to signal, at this point..

And our next question comes from the line of Jim Macdonald from First Analysis Securities..

You talk about how you view the ACA uptake.

How many of your clients do you think will choose you for ACA? And how that will play out, over the next year or two?.

Sure. So, look at the ACA opportunity, really -- and again, two categories. One is, can you help us produce the forms and file with the IRS? And then two, can you help me manage this ongoing requirement of managing measurement periods and benefit classes and the complexity that you need to do to stay compliant, long term.

And I think in the mid-market, customers with at least naturally look at their payroll provider as a potential source for the filings and the ongoing management. I think we're still early in rolling this out to our customers and we have been pleased with the uptick in adoption rates, early on in the cycle. But I think we're the natural choice.

And certainly, we will have the opportunity to be evaluated as the provider in the marketplace..

And can you remind me -- so your total market, you've increased to 250.

Was that 230 or 240 before?.

It was 230 before and we increased it 250. And so obviously, the ACA Enhance a key component of that increase. As we improve our solution as a whole, we certainly evaluate our bundles and offerings. But the key driver was the ACA Enhanced module..

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

Can you guys talk at all about employment trends within the install base?.

Yes, I think that we generally track close to what you see in the macroeconomic factors. So in a low-single-digit GDP environment, then you would imagine that our clients are increasing the number of employees slightly. And so that is something that we do see. It isn't that material, it is certainly not a material driver of revenue performance for us.

But it can be certainly slightly accretive..

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

This is Natasha on for Pat.

I was wondering where you are focusing your R&D dollars now, in terms of new functionality that you might be working on?.

Yes, sure. So I would say we really divide our R&D investments into a couple different categories. One is continuing to just enhance the platform and continue to create differentiation. We're really spending a lot of time on usability and the user interface.

We've gotten a lot of feedback from our customers, in terms of ways that we can make that easier, much more consistent and really increase the adoption rate by their managers, employees, supervisors at the companies. So that's certainly a key area focus, from a differentiation perspective.

We've obviously made significant investments in our ACA Enhanced module, rolling that out and getting feedback, making changes to it. From a longer-term perspective, we will continue to invest in time and labor benefits, talent management and HR.

And we think that those investments could yield not only differentiation, but certainly opportunities, in the long term, to potentially increase the revenue opportunity in each of those categories..

[Operator Instructions]. And our next question comes from the line of Scott Shiao from Bank of America Merrill Lynch..

I had a couple questions around the sales productivity in the broker channel.

What is the driving force behind the better sales productivity? And the acceleration of the broker channel to 30% of revenue which has traditionally been 25%?.

Yes, so I think I will take the first part. The sales productivity, if you look at our history over the last several years, our revenue growth has been approximately 40%. And we've increased our sales headcount roughly a little more than 30%, on average. So we do have a track record of increased sales productivity every year.

And so we continue to see that into the first quarter of this year. From a broker perspective, we've done a lot of work with the brokers over the years. I do think that there's a couple forces that they are dealing with. One is the complexity of ACA which we talked about.

But secondly, there are new entrants in the marketplace that are much more technology-oriented. And are taking an approach, rather than charging for the software, these entrants are looking to capture shares of the insurance commissions.

So I think the brokers are much more naturally looking for technology partners to be able to really recommend to their customers, in an effort to compete with some of these technology providers So I think it is a combination of ACA and that new entrant trend in the marketplace..

Which one would you say is the bigger of the two factors?.

Yes, that's hard to say. I actually think they are both pretty significant factors. And then when you combine that with the data integration capability that we're able to offer, it really creates a pretty powerful value proposition to the brokers.

And then lastly, we're just doing a lot from a marketing perspective, in terms of creating brand awareness, knowledge and creating great partnerships. So it is a combination of our execution and some of the forces that are going on in the market. But I think they are fairly equal..

And then I wanted to ask an ACA-related question. When I went to the user conference, a lot of the customers that were there had -- there was a question about the adoption there. And a lot of them raised their hands, so it seems to indicate that they've adopted the Enhanced modules in bulk.

Is it still in an early stage, where the adoption is still early in the base and the customers at the user conference are, I guess, the more proactive of the customers?.

Yes. So it is obviously a small subset of our overall customers. What we see is approximately -- a little more than 50% of our customers will be required to file for ACA. So the opportunity is limited, really, to about half of our customers. And we're still early in those penetration rates.

So it is difficult to try to look at the adoption rates from those clients that came to the user conference which are usually pretty active, in terms of looking at what our product set, across the board. But it is fair to say that we have been very happy with the early trends, in terms of adoption..

And that concludes our question and answer session for today. I would like to turn the conference back over to Management for any closing comments..

Thank you all for your interest in Paylocity. Hope everyone has a great evening..

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