Peter McGrail – Chief Financial Officer Steven Beauchamp – President, Chief Executive Officer.
Justin Furby – William Blair & Company Terry Tillman – Raymond James & Associates Scott Berg – Needham & Company Nandan Amladi – Deutsche Bank Jeff Houston – Northland Securities Mark Marcon – Robert W.
Baird & Company Jim MacDonald – First Analysis Securities Pat Walravens – JMP Securities Jeff Van Rhee – Craig-Hallum John Byun – UBS Scott Shiao – Bank of America Merrill Lynch.
I would now like to turn the call over to Peter McGrail, CFO. Please go ahead..
Good afternoon and welcome to Paylocity's Earnings Results Call for the Third Quarter of Fiscal 2016, which ended on March 31, 2016. I am 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 close.
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. And there is a reconciliation schedule detailing these results currently available on our press release, which is located on our website at paylocity.com, under the Investor Relations tab and filed with the Securities and Exchange Commission.
The non-revenue financial measures we will discuss today are non-GAAP unless we state the measures as GAAP. With that, let me turn the call over to Steve..
Thank you, Peter. And thanks to all of you for joining us on our third quarter earnings call. We posted another strong quarter with revenue growth of 49.3%, driven by a combination of strong year-to-date sales performance, combined with high penetration of ACA sales back into our existing client base.
Excellent execution by both our sales and implementation teams has resulted in revenue growth of 51.6% year-to-date. With the first nine months of our fiscal year behind us, it is safe to say that our sales organization is having a record year.
Sales rep productivity has accelerated with individual performances on pace to break last year's records for both rookies and veterans.
The combination of enhancements to our product portfolio, increased experience in the sales force, and higher percentage of new business from our broker channel are all key drivers to our sales success this fiscal year. Broker referrals remain above 30% of new business sales for the quarter and year-to-date.
We have hosted several broker events this past quarter with hundreds of referring brokers, and it is clear that the broker landscape is changing. New technology entrants, increased legislation, and commission reductions all create pressure for brokers to differentiate and grow their business.
Insights gathered from our referral partners highlight three key reasons brokers select Paylocity as their partner of choice. The first reason is Paylocity's focus on delivering modern technology with emphasis on fraud data integration capabilities.
The second is the ability of our experienced sales team to share knowledge and create partnerships at the local level, and the third is simply the fact that we are not competing for share of broker commissions. ACA adoption by our current clients is the primary driver in the acceleration of our revenue growth this fiscal year.
We have produced and delivered more than 1 million individual 1095 forms this past quarter. The large majority of clients with 50 or more employees subscribe to our ACA Enhanced offering, which is billed on a per employee month basis, and does not include any implementation fees.
This is the first time that we have dedicated resources to sell back to our client’s base, and we were very pleased with the fact that clients trusted Paylocity to help them navigate the complexities of ACA.
As a reminder, we offered this solution in the second quarter of this fiscal year with high adoption rates, creating an ongoing revenue stream that has contributed significantly to this fiscal year's growth. However, will create a tough comparison in fiscal year 2017.
As indicated in our last earnings call, ACA also impacted the timing of new starts this fiscal year, with many clients starting in October and November of 2015, instead of January 2016 pulling forward implementation revenue into the second quarter.
As a result implementation services and other revenue growth was higher in the second quarter and lower this quarter. However, fiscal year year-to-date growth is 25.5%. It is important to note that overall client growth for the first three-quarters of this fiscal year has been consistent with client growth for the same period last fiscal year.
This was a very busy quarter for all of our operational teams with annual tax filing obligations, W-2s, 1095s, and increased demand by our clients for year-end guidance. Medium sized clients depend on their account manager to help guide them through payroll oriented tasks that occur annually in December and January.
Our teams managed this high level of interaction, while proactively reaching out to all clients who had signed up for ACA to make sure the configuration was taking full advantage of our ACA enhanced offering.
During the quarter, we delivered more than 2 million W-2s, with clients receiving them earlier than last year, while we work with more than 5,000 clients to make sure their ACA setup was completed accurately and timely.
To provide some additional insight, let me share an example of how our consultative approach to implementing our ACA enhanced product, can ease the compliance burden for our clients.
With a few simple setup steps, our ACA Enhanced module automated most the setup required for a 600-plus employee self-insured retail client, that operates stores in multiple states.
With a significant part time workforce and the added complexity of a mix of union and non-union employees, we were able to work with the client to automatically assign employees into benefit classes. The benefit classes allowed them to easily manage different employee types and benefit plans offered across their multiple locations.
The client highlighted the ease in which they could identify the employees who met the offer of coverage, the ability to easily change benefit information, and initiate an offer of coverage event directly from the ACA dashboard, without subscribing to our online benefit enrollment product.
Since the client used our real-time 1095 form previewer, they were also able to review each employee form at their convenience to ensure accuracy. Our focus on continued investments in research and development allowed us to deliver this differentiated ACA experience for our clients.
We increased research and development by 52.3% versus the same period a year ago, when you combine what we capitalized in expense. This legislation changed several times throughout calendar 2016, with final deadlines being delayed at the end of December.
Our approach and commitment to research and development provided the ability to re-prioritize development activities and deploy several agile teams towards our ACA initiative. As a result we could quickly react to early client feedback, while at the same time deliver a compliant ACA solution with a very profitable revenue stream.
We have delivered strong gross margin expansion through the first nine months of the year, with adjusted recurring revenue margin of 75.2% for the quarter and 73.7% for the year.
The addition of higher margin ACA revenue combined with the leverage gained from the reseller purchase, and natural scale in the business model, has allowed us to make great progress in margin expansion this fiscal year. Overall adjusted gross margin is 61.7% fiscal year year-to-date, up 480 basis points from the same period last fiscal year.
As we respond to the accelerated growth experienced this fiscal year, we expect to increase our pace of hiring for our client service teams in the fourth quarter based on our strong year-to-date sales results and our demand for ACA service.
We will also be hiring staff earlier than prior years, to make sure our new team members are fully trained for both year-end activities, and the second year of ACA compliance. I am very proud of the effort provided by all of our operations team, as we continue to deliver revenue retention of greater than 92%.
I would now like to pass the call to Peter, to provide more details on our financial results, along with early thoughts on fiscal 2017..
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 experienced fluctuations in revenues and related costs on a seasonal basis.
Our third quarter revenue is positively impacted by our preparation of W-2s for our client’s employees, and by the addition of new clients that switch providers at the start of the New Year. Our costs on this additional revenue increases during the same period.
Total revenue for the quarter was $70.6 million, which represents a 49.3% increase from the year-ago quarter. On a year-to-date basis we have seen a record 51.6% increase in revenue. This has been our strongest nine month performance in recent Company history.
Our total recurring revenue of $67.1 million was up 52.7% from the year-ago quarter, and represented 95% of our total revenue. As Steve mentioned, this tremendous growth was attributable to the continued wide adoption by our clients of our ACA Enhanced solution, as well as the performance of our sales team throughout fiscal 2016.
On a year-to-date basis recurring revenues have received 53.3%. Recurring fees were up 52.9% in the quarter, and interest revenue increased 33.6% year-over-year. Primarily as a result of our client growth and balance increases. Recurring fees have increased 53.4% for the year-to-date.
Implementation services and other revenue was $3.5 million for the quarter, up 4.6% from the year-ago quarter. As noted in our second quarter conference call, we did have a number of clients start in October and November versus January, so that their 2015 ACA data could be managed in a single platform.
Implementation services and other revenue is up 25.5% for the first nine months of the fiscal year from the same period last year. Adjusted gross profit in the quarter was $45.6 million, representing a margin of 64.7%, as compared to $29.4 million or 62.3% in the year-ago quarter, a 240 basis point improvement.
ACA Enhanced a higher margin product, was a key driver to this increase, along with improvements related to our second reseller acquisition, and other natural cost leverage. For the year-to-date adjusted gross profit was $105.4 million, reflecting a margin of 61.7%, which is a 480 basis point improvement than the same period a year-ago.
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 95% of our revenues.
Our adjusted gross profit on recurring revenues was $50.5 million, or 75.2% in the third quarter, up from $32.4 million, or 73.8% in the year-ago quarter, a 140 basis point improvement. On a year-to-date basis adjusted recurring revenue gross margins increased to 73.7% from 70.3%, a 340 basis point improvement.
Again, this improvement was a combination of the wide adoption of our ACA Enhanced product, along with improvements attributable to our second reseller acquisition, and other natural cost leverage.
As discussed in our second quarter earnings call, given the large scale adoption of our ACA Enhanced product, and the tremendous performance of our sales team in fiscal 2016, we continue to add significant additional operational resources amongst other benefits, this will allow us to provide ongoing ACA-related support to our clients, as well as maintain the highest overall service levels.
We continue to invest in research and development. In addition to significant new modules such as ACA, 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 $8 million, or 11.4% of revenue in the third quarter, a 52.3% increase from the year-ago quarter.
On a non-GAAP basis sales and marketing expense was $16.5 million, or 23.3% of revenue in the quarter, compared to $11.8 million, or 24.9% in the same period last year.
On a non-GAAP basis general and administrative costs were $10.3 million or 14.6% of revenue in the quarter, compared to $7.2 million, or 15.2% of revenue in the year-ago quarter, a 60 basis point improvement. We continue to leverage our G&A costs following our IPO in March of 2014.
Our adjusted EBITDA was $14.6 million, or 20.7% of revenue in the quarter, versus $7.5 million, or 15.9% of revenue in the year-ago quarter. For the first nine months of our fiscal year we generated $25.1 million of adjusted EBITDA, or 14.7% of revenue, versus $7.7 million or 6.8% of revenue for the same period last year, a 229% increase.
Non-GAAP net income was $11.3 million or $0.21 per share for the quarter versus $5.6 million, or $0.11 per share in the year-ago quarter.
For the first nine months of our fiscal year we have generated $16.3 million of non-GAAP net income versus $1.9 million for the same period last year, and non-GAAP net income of approximately $0.4 million for all of last fiscal year.
Briefly covering our GAAP results for the quarter gross profit was $43.4 million, operating income was $6.2 million, and net income was $6.2 million. In regard to the balance sheet we ended the quarter with cash and cash equivalents of $89.7 million.
Cash flows generated by operating activities were $18.3 million in the quarter, versus $9.4 million in the year-ago quarter. This increase was the direct result of our increased non-GAAP net income in the quarter.
For the first nine months of our fiscal year we have generated $29.1 million of operating cash flows, versus $10.2 million for the same period last year. And $11.1 million for all of last fiscal year.
Finally, I would like to provide our financial guidance for the fourth quarter, updated guidance for the full year of fiscal 2016, and some early thoughts on fiscal 2017. For the fourth quarter of 2016 total revenue is expected to be in the range of $57 million to $58 million. Adjusted EBITDA is expected to be in the range of $1 million to $2 million.
Non-GAAP net loss is expected to be in the range of negative $2.7 million to negative $1.7 million, or negative $0.05 to negative $0.03 per share, based on approximately 51 million basic and diluted weighted average common shares outstanding. For all of fiscal 2016 total revenue is expected to be in the range of $227.9 million to $228.9 million.
Or approximately 50% greater than the prior year at the mid-point of the range. Adjusted EBITDA is expected to be in the range of $26.1 million to $27.1 million, an increase of $18.4 million from the prior year at the mid-point of the range.
Non-GAAP net income is expected to be in the range of $13.6 million to $14.6 million, or $0.25 to $0.27 per share, based on approximately 54 million diluted weighted average common shares outstanding, an increase of 13.7 million from the prior year at the mid-point of the range.
When we report our fourth quarter results we expect to provide revenue, adjusted EBITDA and non-GAAP net income guidance for fiscal 2017.
However, given our accelerated revenue growth in the current fiscal year, primarily driven by early widespread adoption of our ACA Enhanced module, we thought it would be helpful to provide some early color on fiscal 2017. As Steve noted previously, we saw the full impact of ACA revenues in the second, third and fourth fiscal quarters this year.
Obviously, this creates challenging comparisons in fiscal 2017 for those three quarters.
At this stage in our planning process, we're comfortable anticipating 25%-plus annual revenue growth in fiscal 2017, with a higher growth rate in the first fiscal quarter where we had negligible ACA revenues, and lower growth rates in the remaining three fiscal quarters.
In regards to adjusted EBITDA, we have made significant progress toward our long-term model in the current year. If you recall, our model anticipated 20% EBITDA margins, once our growth rate reached 20%. In the current year we have guided to a margin of 11.6%, up from 5.4% in the prior year, a 620 basis point improvement.
We benefited from both the impact of higher margin ACA product adoption, and the acquisition of our last remaining reseller.
As we move forward we would expect our adjusted EBITDA margins, as well as our non-GAAP net income margins, to expand to a more measured and ratable pace, as we continue to make progress toward our long-term profitability model.
In summary, we are very pleased with our performance during the quarter, and throughout the first nine months of the fiscal year, culminating in our guidance of 50% revenue growth for the full fiscal year of 2016.
We continue to see strong demand for our unified payroll and HCM solution, and believe we are in the early stages of a major market share shift, from traditional payroll service providers to cloud-based software. One final note. I will be attending the Craig-Hallum Institutional Investor Conference on June 1st in Minneapolis ,and the R. W.
Baird Investor Conference on June 7th in New York, and Steve will be attending the Stifel Technology Conference on June 7th in San Francisco, and the William Blair Growth Stock Conference in Chicago on June 14th. Operator, we are now ready to begin the Q&A session..
Thank you. [Operator Instructions] And our first question comes from the line of Justin Furby of William Blair. Your line is now open..
Justin?.
Please check your mute button..
Sorry, can you hear me?.
Yes. We can hear you now, Justin..
Okay. Apologies for that. I guess a few questions. I wanted to ask about the unit comment, Steve, that I think you made. I think you said that the other day unit growth is sort of in line with last year.
I guess did I hear that right, and if that is the case, I'm curious if you look at your March quarter if you saw any activity where you're seeing customers from ADP, Paychex, the service bureaus who struggled with ACA and moved to you or if you that I that's sort of next year or down the road where you start to actually differentiate from an ACA? And then I have got a couple follow-ups..
Sure. So I think you have to remember that the ACA deadline was moved at the end of December, and so the filings of all the employee 1095s needed to be completed by the end of March. So I think most of our customers were really focused on what they needed to do to have accurate filings, and obviously take advantage of the ACA Enhanced module.
I don't think we have necessarily seen any activity in the marketplace yet.
I think people are focused on getting it done, getting it done accurately, and this will start to gear up as you kind of approach the fall, and they remember what it took to be able to do it, but we do also feel like the product that he have got in terms of ACA Enhanced, does create a differentiated opportunity.
I think the second part of your question was client count, yes I felt like it was important to give you a little bit of color, we don't report client counts until the year is over, but we did take a look at this through the first nine months of the year, and it's accurate to say that our client count growth was for the nine months of the year was in line with what it was last year..
Got it. And then, Peter, you threw it out at the end, the guidance, or I guess the initial look at 2017. Just to sort take a step back, I think you sort of were on a 40% growth trajectory this year, it was like 10 points or so higher than that, I guess largely ACA and cross-selling.
Could you sort of take that out of the model and you think about the normalized trajectory of the business, it feels like 30% growth next year, or something in that area or higher still doable in fiscal 2017? I just want to see if there is anything that I'm missing, and that the 25 plus is just conservatism, or if there's anything else in there that you see in there from a demand standpoint, or from your abilities it hire sales reps or anything else in there? Thanks very much..
Yes. I'll start with that, Peter, and see if you want to add anything. So we don't normally give guidance at this stage. However, because we know that ACA is going to create a tougher compare, we wanted to give you some color.
I think it's important if you step back and last year I think our initial guidance was 30% to 32%, the year prior was 28% to 30%.
And this is a business where we're selling and implementing within the quarter, so we wanted to just give you some kind of 25%-plus type of guidance, because we get a lot of questions in terms of how difficult will that compare be, and so at this point don't think that that's our final guidance.
You're going to get that on the next call, but we feel comfortable at this point knowing what we know that 25%-plus we can certainly stands behind..
Yes. And some acknowledgement that we had a terrific year with ACA, and it's a tougher comparison..
Got it. That's super helpful. And then one more on the services revenue, Peter, you said that there was some pull forward that you called out last quarter in your call.
Was there anything else in there in terms of services revenue, did you feel like your implementation folks were spending more time on the ACA piece and what should we expect for services revenue for Q4? Thanks..
So I think what Steve, so I don't think there was anything special in there. Of course, implementation people have to spend some time on ACA, and as we get more comfortable with it, of course it will become easier for them.
I think what Steve and I both said in our comments about the fourth quarter was, that given ACA it's in its second year, and given our desire to handle that in the second year of compliance, that we would start hiring a little bit earlier in the fourth quarter toward looking toward next fiscal year.
One, to handle ACA, and next to deliver the service levels that our clients, we feel they deserve, and we want to deliver..
Yes. I think if you look at year-to-date implementation being 25.5% year-to-date, client growth being on target to what it was last year, this was not really an issue of us not necessarily getting the volume up and running. It was really just a shift from that third quarter to the second quarter.
And what I would also tell you is implementation revenue can vary in terms of being a little bit different than what annual new recurring revenue, and although implementation revenue went up 4.5%, annual new recurring revenue for the quarter was significantly greater than that on a percentage basis. So we still had a good sales quarter.
It was greater than last year, even despite the pull forward into the second quarter..
Got it. Thanks very much guys. Congratulations..
Thank you. Our next question from the line of Terry Tillman of Raymond James. Your line is now open..
Yes. Hey guys.
Thanks for taking my questions too, and I guess just following up on the prior questions, with your folks in the field and then the broker channel, though, what are you hearing from maybe a broad swath of businesses out there, mid market businesses that under this fire drill around ACA compliance, maybe did kind of more of an ad hoc, or just really just a non-tenable way of dealing with ACA compliance and feeling that pain already to the point that maybe you're seeing some sales opportunities, or is it just too early to tell on that?.
Yes. I think clients have now experienced what it would take with their existing solution to be compliant from an ACA persistence. We are absolutely presenting to customers what our solution looks like. We're having early conversations. We certainly are running the clients that didn't have a great experience.
It's just a little bit early yet, having just completed the filing, and the company filing not being due until the end of June for them to have a full picture, but we certainly feel good about the solution we have available in the market.
We feel really good about how proactive we were with our customers, and we think we delivered a great experience, and that will certainly pay dividends as we are working on new competitive wins in the market..
Okay. And Steven you mentioned just the seismic shifts or changes for the brokers, and how their business is needing to transform, and you're part of the solution or the way they transform.
I guess maybe just a little bit more color on the broker channel, in terms of at this point where are you in terms of the addressable opportunity in terms of just brokers you could work with? What kind of investments you're making into actually even bring more of them I guess into your funnel so to speak, so they could help drive even more business and scale your coverage?.
Yes. We really drive the broker channel through the sales reps. It's an important point to make clear that our sales reps are in the local markets meeting with brokers, partnering with brokers for prospects that they might have, or customers they have.
And so a lot of the efforts that we have, is really providing our sales reps the right education, the right tools, in some cases even doing events and education to the broker community where they see value, such that we are at the top of their mind, and when they see an opportunity, introduce us to a customer, we're the first thing that they mention to the client and so that's really what our effort.
So it's all of, most of our marketing, not all but most of our marketing is really focused on that broker channel, and you can see the results over the last year where we picked up over 30% from brokers that have maintained that for the entire fiscal year..
And just lastly, though as it relates to I think Peter talked about maybe some earlier than typical hiring for implementation or services, but what about sales rep hiring, usually you guys from I'm not mistaken try to get ahead of that as quickly as you can, so the sooner you can have folks in the seats, the sooner they can be productive in the next fiscal year.
Maybe just an update where you are on hiring for next year, and should we assume about 30% growth like typically we see there? Thank you..
Yes. So first of all we're still in the planning process and as usual auto we will give kind of the sales rep headcount growth on our next call. We feel good about the pace of hiring so far.
You are correct, we do a lot of hiring in the spring, and we haven't finalized all of our goals for next year, but we're really trying to drive a certain amount of annual new recurring revenue, in terms of our goal. Our sales teams had a record performance year.
We have gotten great productivity lift out of the sales force, so we're finalizing those targets. We feel good go our hiring pace so far, and we'll give you kind of what we think we need to hit our goals on the next call..
Thank you. And our next question comes from the line of Scott Berg of Needham. Your line is now open..
Hi Steven and Peter. Congratulations on your quarter. A couple of questions here. I guess I am not trying to rehash the ACA commentary, but your commentary seems to differ a little bit from others in the space a little bit, in terms of impact.
Is there a way to help us quantity kind of what that impact is for the year? Is the company year-to-date been a - we'll call it a 40%, 45% with the core business, and the rest being related to pull throughs of ACA, or I am trying to find something different there to compare the two years properly?.
Yes. So not everybody took the same approach for ACA. The approach we took is we offered clients our ACA Enhanced solution, which included us producing the forms. There were no extra fees for the forms, there was no implementation fee.
You turn on the module, we are going to consult with you, we are going to help you get set up, and then we are going bill you on a per-employee per-month basis. And so we got the full recognition of that in second quarter. We will continue in third quarter and fourth quarter.
That obviously will anniversary second quarter of next fiscal year, and since we got such high penetration rate back to our existing clients, we wouldn't necessarily anticipate that would grow at the same rate as the rest of our business.
So some of our competitors charged an upfront fee, some charged a form fee, some charged per employee per month, so it sometimes it does get difficult to compare on an apples-to-apples basis..
We also talked about how many forms we produced, so you could get a sense of how many employees target in our prepared remarks, we talked about over a million forms. We have talked in the past about the pricing, so a $1.00 to $1.50 seems what the market was. We were certainly in that range.
So those are the rough parameters around the monthly math that you could probably work out..
Great. Thank you. That is very helpful. Last question would be around the non-ACA business since you have looked at it from year-to-date. I know we're going to get ARPU color after the fourth quarter call.
Just directionally trying to understand how the business has grown from an ARPU perspective? Are you seeing good trends or attach rates from other aspects, or just the payroll business maybe around your benefit solution, or something else, just trying to understand that? That would be great..
So I think we have given client count because we told we're up a similar percentage as last year. Second piece of that is what our average revenue per customer increase looks like. We will give you that at the end of the year.
It's certainly safe to say that we are seeing adoption rates across our product portfolio increase and therefore, that would then translate into an average revenue per customer higher. So we're seeing kind of a similar formula of high unit growth, with an average customer increase over time.
I won't give you kind of color on the specific numbers yet until next quarter, but we're pretty happy with what we're seeing on both counts..
Great. That's all I had. Thanks for taking the questions..
Thank you. And our next question comes from the line of Nandan Amladi of Deutsche Bank. Your line is now open..
Hi. Good afternoon, thanks for taking my questions. So Steven, last quarter you had mentioned that ACA was the first time you were up-selling into the base.
Have you continued that effort for other modules, and how much progress have you made on that front?.
Yes. So if you remember we started with a very small team. We took an approach where we sold back to the largest customers. We did a lot through the account manager. We were in a compressed time frame to get people signed up.
And I think what we said last time was we would continue with that very small team, potentially upgrading some of our customers, but it wouldn't be our focus. We would stay focused on landing new customers. So we have done that. I don't think that the internal sales, although we have continued them, will be material in the near-term.
Longer-term as potentially unit growth rate is a little bit lower than we would increase our efforts around selling back to the client base. So I obviously told you unit’s growth rate was stayed strong throughout the year, so I think the way to think about it is, we'll do a little bit more of it next year, but we will still be focused on land..
Thanks. And then a follow-up on the broker channel.
Over 30% of new business now coming through the broker channel, how aggressively are you pushing that? You made some mention of it before, but do you have a target in mind over the next say two or three years, for the share of new business that comes through the brokers?.
Yes. I think we were very pleased to see it go above 30%. We were 25% was really kind of our long-term goal, and achieving that and maintaining that we were very happy with. We think the changing landscape, ACA, all of these things factored into, and obviously our focus and execution, factored into our ability to increase that above 30%.
I would certainly be thrilled if we were able to maintain that above 30%. I might also still be happy if we can keep it above 25%, but we're doing a lot of marketing efforts. We have got a lot of conversations with the broker communities. We have got some great partners, we're adding new partners.
We are getting more from the existing partners, so we feel really good with our traction in the broker channel..
Thank you. That's all for me..
Thank you. And our next question comes from the line of Jeff Houston of Northland. Your line is now open..
Hey guys. Thanks for taking my questions.
Looking at the competitive landscape, could you update us on if you're seeing more or less of anybody, in particular Ultimate Software, at the high-end of your target market? Are you seeing them a bit more than you had in the past?.
Yes. So we still see the large traditional payroll providers, ADP and Paychex by far the most. We then see a series of small local and regional players. We then run into people who might be using it in-house, and then you get into pretty small percentages after that. Ultimate Software has not increased at all.
They have been a low small percentage for years, and continue to be that. So no, we have not seen an increase in terms of running into Ultimate Software on a percentage basis..
Got it. All right. Thank you..
And our next question comes from the line of Mark Marcon of R. W. Baird. Your line is now open..
Good afternoon, and thanks for taking my question. For next year how would you view the, you have had 25% revenue growth split between recurring relative to implementation.
Would you expect implementations to be 20% or below, and the real driver being recurring?.
So I think if you look at our history, our overall revenue growth historically has been significantly greater than our implementation revenue growth..
95% of our revenue is recurring..
Right. We are already at 95% recurring. So I wouldn't see anything, whether it's pricing or competitive landscape that would change that trend. I made the point that we grew implementation revenue 4.5% this quarter, but actual recurring revenue grew significantly more, when I just look at the new business that we brought onboard.
So implementation revenue isn't always a perfect proxy to the new business that we're bringing on. Certain products have higher or lower implementation revenue from a competitive dynamics perspective. We want to make sure that we get that profitable long-term recurring revenue, that's our primary goal.
If we get a little bit less implementation revenue to do that, we would certainly make that trade off. We charge competitive rates, and so from my perspective I would anticipate that you would see annual recurring revenue, as well as overall revenue being higher than implementation services..
Great.
And just on that A&R comment, if we strip out the pull forward in terms of the ACA and the bump from that, would you say the trajectory is consistent?.
So I think I understand your question, we had a number of clients pull forward and start in November and December, instead of starting in January, and so from a year-to-date perspective the sales force is having an absolute record year.
If you look simply at the third quarter, we were still up significantly over last year, and if you add the pull forward in, then we had a phenomenal quarter..
Great. And then with regards to next year, just in terms of personnel additions, it sounds like you're going to skew more towards a higher increase in terms of the number of implementation and service folks than sales people.
Is that a correct interpretation?.
So I think from a sales headcount perspective, we really look at it how much new business revenue do we want to generate. As you can see last year we had roughly a 30% increase. We were able to get a lot of productivity increase as well, and we were able to have obviously even absent ACA pretty strong revenue growth this year.
So we really look at it in terms of how many reps do we need, and how much more productive than we think they can be than last year, and this year we have had big productivity increases. So I certainly think that we're going to factor that into the equation. I always would rather have fewer reps producing more revenue, if that's possible.
We're still going to clearly be expanding the sales force. We are on pace for our internal goals so far in terms of hiring. We're similar rate to last year in terms of what we're looking at overall, but if I could have a little bit less reps that are producing more, I would make that trade-off. We just haven't finalized our targets..
Great.
But and it sounds like your newer reps are ramping up even faster than they ever have, and you would expect that to continue? Is that correct?.
Yes. I would tell you, yes. Just as a data point, our top sales rep of the year will post an absolute career record for us, and our rookies will also post records like we have never seen before this year, so we're very pleased overall with the sales team..
Congratulations. Thank you..
Thank you. [Operator Instructions] And our next question comes from the line of Jim MacDonald of First Analysis. Your line is now open..
Good afternoon guys. I had a couple of questions around the implication of your 2017 thoughts there. I know that the 25% is sort of a minimum number, but just thinking about it, so the first quarter is going to have an easy comparison. So let's say that's over 40%.
So that sort of implies 20% growth for the later three quarters, which just doesn't seem likely..
Yes. So we don't want to be giving the final formal guidance at this point in time, we're trying to give you a sense of get a lot of questions from people in terms of jeez, is it possible that you could only grow 20% less year or less, so part of our goal here is to give you this 25%-plus concept, we're in the middle of the planning stages.
At this point in time, and remember two years ago our guidance was 28% to 30%. So it's not that far different than what we have guided over the last couple of years. We just want to make sure that with the information that we have at this point 25%-plus is what we're comfortable with.
We're going to have much better information when we give you the updated guidance, but you are correct. The first quarter will be an easier compare, will be higher and then the following three quarters is where the compare gets more difficult..
I just thinking about it another way. So you have historically had 25% sort of customer growth, and then additional growth from selling more modules and things like that.
So to some extent you hire sales force to that type of a metric, so are you going to change kind of the metrics you hire to?.
So last year client growth I think was 22%..
Right..
And so obviously we told that you we got similar growth through the first nine months of the year, in terms of where we were last year..
We also take the sales organization with the revenue number. We don't actually do a, we don't actually say, this is the productivity we need and this is the number of clients we need. We let them figure out hey, if we need $100, they will figure out how many reps, and how much productivity they want to build into that model.
They have the leeway to do that..
And I think you just have got to go back to our business model suspect 99% visible at this stage. We have to sell and implement these customers for the last quarter of the year, and then into next quarter, and so it is more difficult for a business that is this transactional, to give you this type of guidance a quarter ahead of the end of the year..
And our….
So that is factored into how we thought about giving the 25%-plus..
Certainly it is factored into how our historical guidance has worked, and our previous two years, when we gave guidance as a public entity. As Steven said 28% to 30%, and 30% to 32%. That transactional nature of the business factors into how we think about the year going forward..
Okay. Thanks a lot, guys..
Thank you. And next question comes from the line of Pat Walravens of JMP. Your line is now open..
Great. Thanks.
So Steven, with so many things going well here, I'm just curious what's your primary area of focus in terms of making sure that you guys execute right heading into next year?.
Yes. I don't think it's really any different than any other year that we have been in quite frankly. We're focused right now on hiring talented people, so first and foremost in our sales force. We're adding a lot of new people in the spring and kind of into the summer.
Whereas Peter mentioned as well, we certainly want to get ahead from an implementation and service, so that we have another good year of ACA going into next year. It is really clear that these mid-market companies got caught a little bit late in the game for ACA. They really needed a lot of advice. It was very consultative, very proactive.
We would anticipate that they're still going to need a fair amount of handholding in the next year. So right now it's really focused on putting ourselves in the best position to execute, both from a sales and operations perspective..
And then if I can just add, is there any sort of risk, that you need to keep your eye on, as the percentage of contribution from the broker channel picks up?.
Well, I think you want to make sure that things that are important to them, you have got a differentiated solution. So something like ACA was something we invested in early. We think we created a differentiated approach, and the brokers certainly appreciate that, because that is something that's important to them.
So we do try to align our product roadmap with things that will not only be important to our customer, but be important to our brokers, and I think ACA is a good example of that..
Great. Thank you, Steven..
Thank you. And our next question comes from the line of Jeff Van Rhee of Craig-Hallum. Your line is now open..
Great. Just a couple for me.
In particular the incremental HR module attach rates, did you see any changes with respect to either the attach rates what was getting attached, anything notable that stands out from what you might have been doing say 12 months earlier?.
I would describe it as gradual increase in our attach rates overall across all categories. It's very rare today for us to sell payroll only. It's almost always accompanied with our 4 HR platform, so that continues to increment its way up, time and labor has increased as well, benefits has increased and then talent management has increased.
So I wouldn't have to call any specific one as being an outlier. It's been a gradual increase as we improve those modules. We make them more feature rich. That is I think a big factor in terms of driving the attach rates..
As you look at the pipeline as it stands at this point, any notable changes there as well, verticals, deal sizes, geographies? I mean obviously the productivity of the reps is off the charts, and a lot of things are working, but as you look forward does that suggest the market is pivoting in any way?.
Yes. I don't think we see a lot different competitively in the marketplace. I would tell you as we continue to invest in our product portfolio, and even in an economy that is in a slight growth economy, our average customer size picks up a little bit, but we only see ourselves going outside of our target market very often.
We're talking about roughly a 115 employee average overall, so I think the overall market conditions have been pretty steady. ACA really has been kind of the new wrinkle this past year..
Okay. That's it for me. Thanks..
Thank you..
Next question from the line of John Byun of UBS. Your line is now open..
Hi. Thank you. So I want to go a little bit on the initial thoughts on next year.
I mean if you think about sensitivity for that, I mean what would be drivers that could change that meaningfully for you? Is there anything, any pockets you can point to, products and so on?.
Yes. I think if you look at our history in terms of where we guided, and where we ultimately ended up historically what has driven over performance for us has been execution by our sales organization. So our sales organization having a strong year for us is what is going to allow us to potentially see those initial targets..
And in terms of the pipeline, if you were to kind of adjust for ACA, and I don't know if that's possible.
I mean how would you characterize the pipeline at this time?.
Yes. I think this has been an interesting year for us. It's been a great year for our sales force as a whole.
However, our sales team had just an unbelievable amount of success in the first six months of the fiscal year, and so many customers actually instead of starting in January, they wanted to start in that first six months, and so we're very pleased with the activity rates, we are pleased with the discussions that we're having.
You just saw a different year for us, where people wanted to start a little bit earlier in the year, and then obviously, if you even look at this past quarter, they had to be compliant from an ACA perspective, the deadline was the end of March. We now have a deadline at the end of June.
I think ACA has just changed timing of when customers have started for these mid-market clients. Beyond that really it's been pretty steady from a competitive perspective..
And lastly, any thoughts on the overtime rules, and what's sort of the benefit to, direct benefit or into the conversations that it might lead to? And thank you..
So I think from a macro perspective any time there's legislation changes that create complexity for our customers they look to us for guidance. They look to us for our software and providing them solutions.
And so I don't necessarily think that the overtime rule in itself will be a big revenue opportunity, but it certainly does create some complexity for our customers.
We certainly have solutions that allow them to identify the employees that could be affected, and we also believe that it's a possibility that we may have more customers interested in the time and labor solution, as more employees become hourly..
Thank you..
Thank you. And our final question comes from the line of Scott Shiao of Bank of America. Your line is now open..
Hi. You mentioned that there was record sales productivity.
I just wanted to clarify if that was on a customer add basis, dollar basis or both?.
Well, I certainly have given you some color that the overall unit growth through the first nine months of the year has been pretty consistent from last year.
That we increased our sales force last year at a rate of 30%, so I think that would tell you that we have had some pretty strong average revenue per customer increases this year, and that's been a key driver in productivity increases..
Okay. Got it.
Then would it be fair to say that the sales productivity that it had, that ACA had a fairly noticeable fact that X the ACA that productivity would have been more moderate versus last year?.
Yes. So let me be clear. The sales productivity increase does not include selling ACA back to our current clients. And so that was handled by kind of an inside sales group, and all of the various methods I have talked about leveraging the account manager. There was no commission associate with that with our sales force.
Our sales force was signing new customers up for ACA, so that might be a little bit helpful, but we think the increased productivity has really been driven by our other products, benefits, core HR, time and labor, talent management versus ACA..
Okay. Got it. Thanks..
All right. Thank you very much. We appreciate all of your time today, and interest in Paylocity..
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..