Peter McGrail - CFO Steve Beauchamp - President and CEO.

Justin Furby - William Blair Nandan Amladi - Deutsche Bank Ross MacMillan - RBC Capital Markets Jeff Van Rhee - Craig-Hallum. Terry Tillman - Raymond James Natasha Asar - JMP Securities Trevor Upton - Pacific Crest Securities John Byun - UBS Jim Macdonald - First Analysis Mark Marcon - Baird.

Good day, ladies and gentlemen, and welcome to the Paylocity First Quarter Fiscal 2017 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. [Operator Instruction] As a reminder, this conference is being recorded.

I would now like to turn the floor over to Peter McGrail, Chief Financial Officer. Please go ahead, sir..

Thank you, good afternoon and welcome to Paylocity's earnings results call for the first quarter of fiscal 2017, which ended on September 30, 2016. I'm Peter McGrail, CFO, and joining me on the call today is Steve Beauchamp, CEO of Paylocity. Today we will be discussing the results announced in our press release issued after the market 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, 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 take 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 measures to their directly comparable GAAP financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. With that, let me turn the call over to Steve..

Thank you, Peter, and thanks to all of you for joining us on our first quarter fiscal 2017 earnings call. We're off to a good start in fiscal 2017 with total revenue of 65 million in the first quarter, an increase of 44.1% versus the same period last year.

Recurring revenue grew by 46%, driven by new client additions and the growth of our ACA enhanced product, which launched in the fall of fiscal 2016. Adjusted EBITDA expanded from 3.3 million or 7.3% of revenue in the first quarter of fiscal 2016, to 8 million or 12.3% of revenue in the first quarter of fiscal 2017.

The 500 basis point improvement in adjusted EBITDA was driven by improvements in gross profit, combined with increased operating leverage, including 210 basis points of leverage within G&A as we continue to scale the business. When evaluating fiscal 2017 performance, it is important to understand the ACA impacted our business in several ways.

First, last fiscal year, we were able to sign up the majority of our clients with over 50 employees through our ACA enhanced product as we filed more than one million 1095 and created an additional recurring revenue stream from current clients starting in the second quarter of last fiscal year.

As discussed on prior earnings calls, this will create a challenging revenue growth comparison beginning in the second quarter of this fiscal year.

Second, many of our new clients who would normally start in January moved up there start dates to October and November last fiscal year as evidenced by the record 52% implementation in other revenue growth we saw in the second quarter of fiscal 2016.

Overall, we believe that ACA impacted the timing of new starts in fiscal 2016, with more clients starting in the first half of the year, contrary to our historical norms.

Lastly, as you may recall, our broker referral percentage increased from 25% to 30% last fiscal year which we believe was at least partially due to ACA compliance and the increased referrals from benefit brokers.

We once again generated more than 30% of our new sales revenue from brokers in the first quarter of fiscal 2017, however, we did experience some moderation in the channel. We remain committed to this channel and believe we can offer brokers a unique value proposition.

As a result, we continue to make investments in the channel to strengthen our partnerships and recently launched our new broker portal. The portal includes and analytics dashboard which provides real time insight for brokers including employee growth rates, turnover, ACA compliance, eligibility, and participation rates.

With the client's permission, brokers can now have real time access to this data versus waiting for annual census reports. As discussed on our last earnings call, we doubled the number of solution consultants this fiscal year.

The solution consultants are product experts that are skilled in demonstrating the value of our platforms, enabling us to better present the increased breadth of our product portfolio. The additional solution consultants provide us the ability to increase the percentage of new sales hires from out of the industry.

We expect new sales rep hiring for fiscal 2018 to be more evenly distributed throughout this fiscal year versus waiting until spring and summer to add most of our new sales headcount. The increased average tenure of the new reps going into fiscal year 2018 will provide more time for training and development prior to the annual fall selling season.

Overall, we feel good about the initiatives in our sales force despite some of the difficult comparisons in the first half of this fiscal year. We expanded adjusted gross profit from $26.5 million, or 58.8%, in the first quarter of fiscal 2016 to $39.3 million, or 60.4%, in the first quarter of fiscal 2017. A 160 basis point improvement.

We have been able to achieve this gross margin expansion while at the same time hiring client service team members earlier than last year. Mid-market clients rely on Paylocity to help guide them through legislative changes, compliance activities, and annual year end related tasks.

We have rolled out a comprehensive internal training program, which we feel positions us to proactively manage the second year of ACA, along with the normal increase in client requests we receive every calendar yearend.

We believe the combination of our industry leading staff, HCM platform, and a focus on delivering great service to our clients, are the key contributors to maintaining our 92% revenue retention rate.

We recently highlighted our product roadmap at our annual client conference, emphasizing our continued focus on delivering innovative HCM solutions for the mid-market. We hosted more than a thousand attendees for a three day event in downtown Chicago.

Clients were able to choose from more than 70 different breakout sessions across a wide variety of HR topics. Key product themes from the client conference included introduction of our enhanced analytics features, a predictive retention dashboard, and real time integration capabilities with our API.

We also introduced a new version of our mobile app which will be available in the App Store November. Our mobile app currently gets more than 70,000 average daily users per day and will be updated with a completely new look and feel.

We also introduced several enhancements to our account management suite, with performance journals and a new comprehensive talent dashboard. Our Product Development team had the opportunity to host clients in our Product Connection Zone, 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 a total, R&D spend increased by 35.7% this quarter, versus the same period last year when you consider what we expensed and capitalized. Our focus on continually investing in our technology was a key contributor in us being named one of the top 100 digital companies in Chicago, ranking at number 13.

We were also pleased to have been recognized as one of the 25 highest-rated public cloud computing companies to work for by Glassdoor and Battery Ventures. With more than 370 employee reviews on Glassdoor, employees rated Paylocity 4.5 out of 5, with 92% of reviewers willing to recommend us to a friend.

We continue to believe that our biggest strength is the talent we have been able to recruit and more importantly, retain. I'd now like to pass the call to Peter to provide more details on our financial results..

Thanks, Steve. Let me walk through the results and provide more detail. Total revenue for the quarter was 65 million, which represents a 44.1% increase from the same period in the prior year. For the first quarter, our total recurring revenue of 62.6 million was up 46% from the year ago quarter and represented 96% of our total revenue.

Sales from new clients, as well as a full quarter of revenue from our ACA product, were the key drivers of the year-over-year growth in the first quarter. Recurring fees were up 46.2% in the quarter and interest revenue was up 35.8% year-over-year, primarily as a result of balance increases.

Implementation services and other revenue was 2.4 million for the first quarter, up 7.6% from the year ago quarter. As we noted last quarter, implementation services revenue growth has impacted by our product mix. In general, HCM modules command less implementation fees in the marketplace than payroll.

We also have seen less growth on our other revenue category, the largest portion being clock hardware purchases. Clock purchases have declined as clients moved towards mobile or other advanced time capture solutions.

As we look forward to next quarter, you will recall that we had a record implementation revenue growth of 52% was second quarter of last year, largely driven by the pull forward of business into October and November, from January, as clients were taking advantage of our robust ACA solutions.

As a result, we would expect that implementation services and other revenue in absolute dollars would be less in the second fiscal quarter of this year as compared to the prior year. Our annual revenue retention rate, which is always calculated on a trailing 12-month basis, remained above 92%, as it has for several years.

Our adjusted recurring gross profit on recurring revenues was 45.8 million or 73.2% in the first quarter, up from 31.1 million or 72.4% in the year ago quarter, an 80 basis point improvement. This improvement in margin was a result of natural scale in our business.

As Steve noted, we focused on hiring operation staff earlier this year and are now well-positioned to serve our clients during the upcoming busy season. Adjusted gross profit in the first quarter was 39.3 million, representing a gross margin of 60.4%, as compared to 26.5 million, or 58.8%, in the first quarter of 2016, 160 basis point improvement.

This improvement in adjusted gross margin was a result of the continued scale in our business. We continue to invest in research and development. In addition to new margins and capability like recruiting, 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 9.3 million, or 14.3% of revenue in the first quarter, compared to 6.8 million, or 15.2% of revenue in the year ago quarter.

On a dollar basis, our year-over-year investment in total research and development increased by 35.7%. On a non-GAAP basis, sales and marketing expense was 16.4 million, or 25.2% of revenue in the first quarter, compared to 11.5 million, or 25.5% in the same period last year.

On a non-GAAP basis, general and administrative costs were 10.8 million, or 16.5% of revenue in the first quarter, compared to 8.4 million, or 18.6% of revenue in the year ago quarter, a 210 basis point improvement.

We continue to be pleased by our ability to consistently leverage our general and administrative expenses on an annual basis as we steadily move closer to our long-term range of 10% to 15% of revenue. Our adjusted EBITDA was 8 million for the quarter, versus 3.3 million for the year ago quarter, a 500 basis point increase.

Non-GAAP net income was 4 million, or $0.07 per share for the quarter, versus 0.9 million, or $0.02 per share in the year ago quarter. Briefly covering our GAAP results, for the quarter gross profit was 36.7 million, operating loss was negative 2.5 million, and net loss was negative 2.6 million.

In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $78 million. From a cash flow perspective, we generated 1.9 million in cash from operating activities in the first quarter of fiscal 2017 as compared to 3 million for the prior year first quarter.

Other than the timing of payroll accruals, we generated significantly more cash from operations in the current quarter than in the year ago quarter. Finally, I'd like to provide our financial guidance for the second quarter and for the full year of fiscal 2017.

As we've noted for the last few quarters, the wide adoption of our ACA enhanced product beginning in earnest in the second fiscal quarter of last year, creates challenging comparisons for the remainder of this fiscal year. This comparison is especially acute in the second quarter, as our prior year quarterly revenue grew a record 61%.

To reiterate, in addition to the widespread adoption of our ACA product in the quarter, we also had a number of clients pull forward their stocks into October and November versus January, so that their ACA data could be managed in a single platform.

With this as a backdrop, total revenue in the second quarter is expected to be in the range of 66 million to 67 million, or approximately 20% to 21% greater than the prior year. Adjusted EBITDA is expected to be in the range of 5 million to 6 million.

Non-GAAP net income is expected to be in the range of 0.5 million to 1.5 million, or $0.01 to $0.03 per share, based on approximately 54 million diluted weighted average common shares outstanding.

Combining our short sales cycles with the significant impact that ACA has had on our business's overall revenue growth we decided to affirm our annual revenue guidance. As a result, total revenue is expected to be in the range of $296 million to $298 million, or approximately 28% to 29% greater than the prior year.

Adjusted EBITDA is expected to be in the range of $37.5 million to $39.5 million, an increase of $1.5 million from previous guidance.

Non-GAAP net income is expected to be in the range of $20 million to $22 million, an increase of $1 million from previous guidance, or $0.36 to $0.40 per share, based on approximately 55 million diluted weighted average common shares outstanding.

One final note, Steve and I will be attending the Stifel Midwest One on One Conference in Chicago on November 10, and the UBS Global Technology Conference in San Francisco on November 14. Operator, we are now ready to begin the Q&A session..

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

Thanks, guys. A couple questions, I guess, Steve, first for you.

You guys obviously had solid numbers, I'm just wondering though, if you look at guidance and that of one of your competitors, it seems that maybe it is not just a tough comp discussion as we move into the December quarter, and I'm just wondering if you look but think back over the last 90 days if you've seen, if you're seeing something else in terms of a change, in terms of companies willingness to switch systems, and you mentioned the broker channel, but just anymore context around the decision to keep the full year where it is would be helpful and then I've got one follow up.

Thanks..

Sure. I think as we look at the balance of the year, particularly next quarter, you've got two impacts.

One is the enhanced ACA product that we launched in second quarter of last year and the ongoing revenue stream that that created, plus the fact that we had so many customers start earlier, so we have both impacts happening next quarter, which obviously was a 60% growth quarter that we are comparing.

So I think when you factor that in, that's probably the biggest impact as we look at next quarter. You can see we've guided up on growth in the third and fourth quarter from next quarter when we look at the year as a whole. From a competitive perspective, I think we are first quarter into the year so it's still early for us.

We haven't seen a lot of changes competitive dynamics. I think the one caveat to that is we have seen the broker channel moderate a little bit, so we give you a number, 30% plus, that increased last year from 25%.

It's still over 30%, but it was certainly higher last year at this time, so we certainly factor that a little bit in terms of how we look at the balance of the year..

Got it. And then in terms of the hiring changes, and doing that more throughout the year versus the spring season. Can you talk about what drove that change? And I'm curious if you can comment on the incoming team that came over earlier this year and what you're seeing from a productivity and from a ramp standpoint. Thanks..

Sure, as we talked about on our last earnings call, we made some slight changes as we continue to grow to the approach that we take in terms of hiring, training, and even managing the sales process with our product experts called solution consultants.

And so we realize that as we continue to grow, we will have to be mixed in we still primarily hire people from the industry, but we mix in others with business to business experience. So they're not necessarily directly from college, but three, five plus years of business to business sales experience.

That does require a little bit more effort in terms of training and development, but it also opens the opportunity for us to be able to hire throughout the year. The reason we couldn't hire people from the industry in the fall was the people who are doing well generally do not want to move until after selling season.

Naturally, you have to hire them in the spring and summertime, so we think that we may have to spend just a little bit more time training, we will leverage the solution consultants, but we get the advantage of really trying to even out the hiring, instead of doing all of our hiring in the spring and summer..

Okay, got it, thank you..

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

Hey Terry..

It seems he has left the queue, we'll move on. Our next question comes from the line of Nandan Amladi, Deutsche Bank..

Thanks for taking my question. Steve, you talked about the broker channel a little bit. The broker channel historically has not been permission-based, so as a source of leverage, since some of those leads, fairly qualified leads I'd imagine come to you from broker channels.

Is that a source of leverage for you in the longer-term?.

I think the thing that we really like about the broker channel is they do provide, as you mentioned, high qualified leads that do close at a higher ratio. If you look at our history, we've been around 25%, kind of 25%-plus, and then last year we had a bump, which we certainly would attribute at least part of that bump to ACA and going to 30%.

And so our ability to continue to generate leads from the broker channel does make our go to market strategy a little bit more efficient, but that number hasn't moved around enough in general to drive any type of cost efficiencies.

We've been generally around the same percentage of revenue in terms of sales and marketing expense so I'm not sure I see that as an efficiency, we are just focused on maintaining that channel going forward..

Okay, and then another question on leverage. Gross margins have steadily improved over the last couple of years, we have (inaudible) functions after you talk to brokers.

What other sources are there in addition to G&A you touched on during your script?.

So we talked about above the line, we've talked about adjusted gross profit, being able to grind that out year after year, and I think we've shown that 800 basis points in the last couple of years, 160 basis points in this quarter, so a steady march forward, a planned march forward for us.

And we've talked about overall margin moving up toward 80 to 100 basis points a year, grinding it out.

You mentioned things that have helped us in the past, resellers, ACA certainly helped us but natural leverage does help us and we plan for it, and we strive very hard to achieve it and we certainly got more than that in this quarter, but we start every year with a goal, 80 to 100 basis points we want to march it forward and we try to at least meet or exceed that..

Thank you..

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

Thanks so much.

Steve, I wondered if you could comment, I think ADP this week made some comments that their sort of forced migration in their mid-market is ongoing, but the level of retention has actually improved as they've moved along the cycle, and just given what you are seeing, given what some of your competitors are seeing, I was just curious as to whether you think there is fewer decisions to re-platform being made as result of ADP frankly losing your customers out of their legacy base.

Any thoughts on that?.

Yes, we have obviously spent some time talking to the sales force on the competitive dynamics, we still continue to get a significant portion of our business from ADP, and then in combination when you look at ADP and Paychex, you get to roughly half. That has not changed.

We don't really see a lot of changes from the competitive environment perspective with ADP. That's been a good source of business for us traditionally, I'm not sure things have changed.

The only change that we really see right now on the market is the brokers just aren't quite as active as you see last year, because obviously ACA was really important to them. So just from a lead channel, from the broker channel, that's probably the only thing that we see different in terms of sales and marketing go to market..

Okay, that's great, and then on the sales hiring cadence change, just help me understand a more even spread as opposed to a more focused effort in the spring, what is the implication as we think about '18.

Does it mean that you will have more tenured recent hires? Does it mean that -- just maybe you could add some color around what it means to '18?.

I think if you take a step back, historically we've hired in the spring and the summer and we've historically hired industry-experienced folks.

As we start to mix in those with B2B experience that might not be directly from the industry, we do think we need a little bit more time from a training perspective and we've got to leverage our solution consultants a little bit more in the cycle.

And so, by hiring those individuals little earlier, or even more evenly across the year, we will get a little bit higher average tenure over all and we think that we need a little bit more time with those reps that maybe don't come with the direct industry experience.

It also makes it a little bit easier just from a recruiting and onboarding and managing all those hires and we think that long-term is a more scalable model, but it has some pros and cons.

You lose a little bit of the industry experience, but you get a little bit more time with them, so you can shape them and you can really leverage those product experts. So we feel overall, it's a pretty positive change for us..

Thanks so much..

Thank you. And our next question comes from a line of Jeff Van Rhee from Craig-Hallum..

Thanks. Several questions, mostly around the sales side of things.

First, as you look at the individual reps and the productivity, have you seen any wiggle? I get the commentary about the difficult compares, we do our best to adjust out ACA, but it certainly looks like on any rolling average, even two, three, four together, it's more deceleration than I was looking for.

Have you seen any wiggles whatsoever with respect to close rates, cycles, breadth of pipeline at the front-end? Anything that has sort of caught your attention that and you had to adapt or attack to take on?.

What I would say to you, you know, I mentioned obviously, the broker channel decelerating just slightly. That's probably the biggest thing that I would point to. Our prior-year beats have really been driven by pretty significant over-performance in the sales force.

These are much more tough compares for the sales force to be able to have those same type of beats. So ACA last year did create a lot of activity, particularly in the broker channel, and so trying to beat over those numbers is certainly much more challenging for the sales force.

But beyond that, I really wouldn't point to any specific trends competitively or even within our sales force..

Okay, and then, how should we think about capacity as this year? I couldn't recall if you had commented on that, just any thoughts on what kind of sales capacity you think you add through '17?.

Do you mean in terms of number of salespeople?.

Yes, number of reps, you know, net sales capacity added, probably reps is the best way to count it..

Sure, so last year we added 25% new reps, which is 205 going into this year.

As I mentioned, we typically give the number of sales reps at the end of each fiscal year, so we are actively now hiring some of these out-of-industry reps, which we really haven't done in the past and then we will really kick up our industry hiring in the spring and summer, and we'll give you that headcount number at the end of the fiscal year..

Got it. Okay, and then I guess just lastly, as it relates to the customer support and customer service side, any meaningful process changes in terms of just the way the org is structured? I know you have gone through some iterations trying to get more sustainable relationships between the touch points and the customers.

Any real changes recent that you would call out in the support organization?.

No, I think that last year ACA created certainly some tailwinds in terms of our ACA enhanced product, but it did create some burden in terms of really trying service those customers. I think we mentioned last year we had a wave of sign ups in the fall. We were a little bit of catch up activity in terms of hiring.

We rolled out a very comprehensive training program. We have all of our account managers fully trained going into yearend. We have them staffed earlier and so this will feel a little but more like a normal year than this wave of ACA activity. And so I think our training and development plan, we feel very good going into year end this year..

Okay, great, thanks..

Thank you. Our next question comes from the line of Terry Tillman from Raymond James..

Good afternoon, guys. I will go ahead and apologize, somehow I was knocked off the call so my question has been asked four times, but I can't help myself to ask these questions.

First, the idea, Steve, of out of industry reps, and again, you may have touched on this, but is it harder to find folks from the service bureaus or have you picked through the good ones, and that's why you're going out of industry? I would like to understand more about acquisition strategy..

I think it really comes from a couple key drivers. Number one, we really broadened our platform over time. If you remember, we, at IPO, we would sell a customer a max of $200 per employee per year, that's now $270 per employee per year.

So as we looked at, how do we really get the most sold for those new customers, we really felt like we could start leveraging these solution consultants more. We had a higher close rate when we have added the solution consultants.

As we started leveraging that solution consultant, it gave us more capabilities to look for more selling skills, purely than just industry skills. Just to be clear, we still hire more from the industry than outside of the industry.

So it's not that we are moving the model, we are just really layering in some of these B2B salespeople that really have great sales talent and we can teach them enough of the broader concepts and then we can layer in our solution consultants for the really detailed demos.

I think it's a combination of looking at what was successful for us in the past, and then there is a big benefit of really layering these people in more evenly throughout the year and not having this giant push right at the end of the year.

So we think this is certainly a more scalable model, layering in both industry experience people as well as outside B2B experience..

And Peter, a question for you in terms of R&D.

It ramped significantly this year and you all talked a lot about the ongoing innovation and you laid out the roadmap of the product at the user conference, but should we think maybe this is a high watermark as a percentage of revenue this year when you look at cap software and R&D on the income statement? Or could it keep ramping? Just trying to get a sense on when we can see some leverage born out in R&D? Thanks..

I think certainly we are still committed to the R&D channel. I think Steve talked about it pretty extensively in his prepared comments. Long term goal, long term model is 10% to 15%, we said early on in our lifecycle, which I believe we are still in, we would be in the higher end of that range.

I think last year at this time we were saying the 15% range, this year we are 14%. That's not a material difference in our minds, but the point being, we're still committed to the channel and to the research and development sort of line item in the near term..

Thank you. We do have our next question comes from the line of Patrick Walravens from JMP Securities..

This is Natasha on for Pat.

Looking specifically at implementation revenue, I know you touched on the impact you see for Q2, but how do you see that longer-term? Do you see that dramatically declining? Looking at both a few quarters out and next year?.

I think there are two factors that we look at in implementation revenue. Number one, the HPM modules that we continue to sell more, and that are really driving the average revenue per customer up, do not necessarily command the same level of implementation revenue. So it doesn't necessarily mean that it's going to be tied.

Implementation revenue growth isn't necessarily tied to new sales growth as obviously because of that. And two, it's really implementation and other, and Peter mentioned in his prepared remarks that other category really isn't growing very much at all.

So when you put all that together, implementation revenue, it doesn't necessarily tie as directly to new sales. There is a tie to it, though we do see that potentially deviate from quarter to quarter, based off where we have new sales.

Peter also mentioned in his prepared remarks that implementation revenue next quarter will be less in absolute dollar amount. That's really because of the ACA, a tough compare with all the client pull-forward..

Okay, great. Thank you..

Thank you. And our next question comes from the line of Trevor Upton from Pacific Crest Securities..

Hi, thanks so much for taking my question. Just another one on sales reps and productivity. Steve, historically you've mentioned that you have kind of a targeted amount of revenue and you look at your sales rep productivity and then you hire sales reps accordingly.

Does your earlier hiring suggest any change in your applications around productivity?.

I'm not sure that the earlier hiring necessarily has a big impact on how we look back productivity. We do think that we need a little bit more time with folks that come from out of the industry.

I think hiring them early in the year does give us that opportunity to spend more time kind of training and development, and I think if we had an ideal goal, we would love to be able to say that those out of industry hires could have similar productivity levels to new hires within the industry, because we've got a little bit of extra time with them.

This is relatively new so we've got to execute on that, but our goal would be to have similar productivity levels to new hires from the industry..

Okay, and having them longer before they reach the similar productivity suggests maybe lower margins? Should we change how we think about sales and marketing and leverage there?.

I think at this point in time we are early in shifting some of the new hires to out-of-industry. Again, I want to emphasize the point we are still hiring mostly from within the industry, so this isn't a wholesale change in our strategy, it's a tweak. And so I wouldn't necessarily think it's going to have a big impact on the sales margin side..

Lastly, on the investments in machine learning.

What are you seeing from your customers as far as demand and their ability to leverage these unique tools?.

I think you've got to think about our market segment for a second and the average customer with 100 or 120 employees, is not necessarily as sophisticated as you might see in the enterprise space.

And so sometimes the demands we get from them are really to be able to use the data and the analytics that we have in our platform, to really surface insights to them that traditionally they might be exporting data to Excel, they might be manually doing the analysis.

And so things like our new retention dashboard that's looking at key drivers and identifying employees at risk, are things that are being very well received within our customer base, and those are areas that we are certainly going to continue to make investments in..

Okay, great. Thank you very much. That's all I have..

Thank you. And our next question comes from the line of John Byun from UBS..

Hi, thanks. First question is related to the last one. You talked a lot about analytics and the product roadmap.

What is the approach in terms of monetizing that? Is it going to be embedded in your current product or could it be more add-ons or a combination maybe?.

Sure. I think our focus at the moment is to really try to drive these insights and analytics that we are able to derive based off the significant amount of data that we store on behalf of our clients, surfaced inside the product today.

And at this point, that doesn't necessarily mean we are going to monetize it, although it makes certainly those products more likely to be sold, it creates differentiation and that's where we are really focused from an analytics perspective. Longer-term, there may potentially be opportunities to monetize that over time.

We just see that as a longer-term opportunity versus short-term..

Okay, great. And in the broker channel, we've asked this a few different ways, but besides the ACA impact, was there anything else that might explain some of the slight deceleration, maybe some of the other competitive players are making more noise, or anything like that? Thanks..

Yes, so this has been a focus for us for a long time really partnering with brokers, and we have a lot of contact with our brokers and we've just released a brand-new broker portal to the brokers and really interacted and got feedback from them.

I think if you really look at what happened in their world, ACA was a problem they had to help their customer solve last year. That created incremental conversations about how are they storing the data and managing the data, and it obviously tied into their HCM and payroll platform pretty nicely.

At this point, second year of ACA, customers have -- most customers have figured out a way to manage ACA, so those conversations just don't naturally happen as much, so we believe at least that it's really the ACA differential that has driven a lower level of broker activity.

But again, I want to emphasize the fact that it was still over 30% for the quarter with some deceleration in there, so it's still a pretty strong number for us..

Thanks very much..

Thank you. And our next question comes from a line of Jim Macdonald from First Analysis..

Most of my questions have been answered, but a couple more on the sales side.

Any comments on your sales retention of your sales force? Has that changed over time? And how do you view the competitive market for hiring experienced payroll salespeople these days?.

Sure. So I think from a retention perspective, we've absolutely been consistent with our historical retention rates within the sales force, so no change, number one.

I think number two, I think more than anything, there's certainly availability of talent in the market within the industry experience, but as those numbers and absolute numbers get larger each year and we continue to grow, we felt like we could get higher quality sales experience from a portion of our hires by mixing in out-of-industry hires than purely sticking to the industry.

As the numbers get larger, we felt like mixing those two things would give us overall higher quality of folks. I think the availability is still there. We just feel like they benefit of evening out the hiring throughout the year, plus opening up a whole new pool will allow us to attract a higher level..

Great, that's all I have..

Thank you. And our next question comes from a line of Mark Marcon from Baird..

Just a follow-on on the new sales talent and the higher quality from some of the people outside of the industry.

How many have you -- how much experience have you had with those folks? How quickly do they ramp up? What are you seeing in terms of productivity metrics?.

Sure, so in fairness, this is a new initiative. Obviously, we are talking about it as we are really rolling that out. This year is really the first time that we have any significant number of hires from outside of the industry.

It's also the first year that we really rolled out a new process with our solution consultants being involved in every one of their deals. So we are essentially one quarter into that experience.

And one of the reasons we certainly are looking to hire those folks earlier is we certainly learned through the training process, there is more that we can do for them to get them prepared to get off to a good start. We are in the learning process with that group. It isn't a huge portion of our sales force.

Again, it is a smaller portion of our sales force, but we think that hiring them earlier and the learning's that we got from our first group of hires will put us in a much better position in fiscal 2018 to leverage that group..

Thank you, Steve, and can you just talk a little bit about a typical profile like would they typically be a couple years out in terms of sales experience? What can you tell us there?.

Sure. I think some of that we'll obviously continued to figure out overtime, but I think our early thoughts on that concept are that three, maybe five plus years of B2B sales experience. We would certainly like some level of technical experience involved with that.

But more than anything, it's business to business, focused on prospecting, focus on high level presentations to the decision makers, and then closing the business. We then have got to layer in that HCM knowledge and then give them the support with the solution consultants. We think that's the formula.

We will continue to tweak it based off the results we have, but we certainly have been happy with the quality of people we've been able to hire..

Great. And then can you talk a little bit about the having the recruiting platform and what that means in terms of checking off boxes on potential RFPs? And what level of extra receptivity you might end up getting during this fall selling season..

Sure. I think it's important to note that we don't necessarily see a lot of activity in RFPs and our market segment with a 100 employee or 200 employee account, it's less RFP driven. However, I think your point is a good one which is, having our own recruiting platform that we are able to present to customers, demonstrate to them.

One of the big advantages you got in a single platform is if you are going to post a job externally, it's instantly available on your internal portal as well. You can easily manage internal and external applicants, which is a really great advantage for these mid-sized customers instead of managing two separate tools.

We think it's certainly helpful and we are early in the sales cycle of it, it's available as of January 1, but we certainly have got some sign ups already and new customers signed up to start with us in January..

Great, and then just a numbers question.

Can you give us a little bit of help with regards to thinking through sequentially the expenses with the EBITDA guide?.

With the EBITDA guide? A little more detail?.

Specifically, like how should we think through the implementation cost?.

Certainly, we are not going to adjust implementation cost in the second quarter because of the anomaly that ACA brought to us. Those costs remain relatively steady, you could see that historically, they grow in a pattern that is much more understandable, frankly, then how the revenue grows with the various factors we laid out.

So that certainly won't change. And we have said I think pretty repeatedly that we are always looking for now that we're out of ACA build and now that we are out of buying are resells, 80 to 100 basis points a year is what we try to grind out. We always try to beat that, we plan it and try to beat it every year.

So and depending on when we hire and how we hire is the way the expenses will slot in. In the quarters as you may recall last year, we said we are going to hire operations people a little earlier so they will be ready for the selling cycle, so I think that's what you can expect..

Great, thank you..

Thank you. Our next question is a follow up from Jeff Van Rhee from Craig Hallum..

Just one brief follow up.

As it relates to the modules, did you see any variance to prior quarter attach rates of the various modules, any stand out as particularly strong, or showing a pattern that was atypical?.

I think if you look at our history we been able to generate increases in average revenue per customer really by selling a little but more of each of our modules to all of our new customers. I think that we haven't necessarily seen one module spike in terms of some sort of penetration rate.

We continue to get great penetration rate in HR and we see increases in benefits, time and labor, and talent..

Got it, thank you..

Thank you. And we also have a follow-up from the line of Justin Furby from William Blair..

Thanks. Just wanted to follow-up on just for setting our models for the second half of the year in terms of the acceleration.

Steve and Peter, I guess, should we expect that the March and June quarter should have similar growth rates, that they should step up and you would be at a higher growth rate in June? What should the progression look like? And then just one last piece on the broker channel, I was just curious, Steve, if when you actually saw that, was that late in the quarter? Is it sort of in the month of October? And then, can you reallocate where you focus your sales reps as you see that? I think they have certain quotas on the amount of time they are supposed to be focused on the broker channel, so can you think about ways of just spending more time in the direct market? Thanks..

Let me start with the last one and then maybe Peter can put some color on what that might imply for the last two quarters. The sales reps are incented to be able to generate new business revenue and ultimately the reason they like working with the brokers is they typically close at a higher rate and they've leveraged those relationships over time.

So I think they have natural incentives to want to work with the brokers, but if there's a little bit less activity in the broker channel, the sales rep will react with a little bit more direct initiative to try to generate business.

So I'm not sure there's anything we have to do organizationally, the incentive structure certainly creates that incentive, and the more they sell, the more money they make, so I think we already have that incentive built in..

And you're thinking about revenue over the last couple of quarters.

Just like any year for us, the sales don't slot in to every month exactly as they've slotted in the prior year, and we have this really interesting anomalaic year in fiscal year '16 that we are comparing to, so expectations are, we can't say, oh, our expectations are this even split over the last two quarters.

The sales will fall where they fall, and we will follow along, and those percentages will fall where they fall..

I think it's safe to say in the second quarter of our fiscal year, we had the unusual pull-forward of sales into the quarter. There is no unusual items besides the normal cadence of our business over the last two quarters..

That's right..

Thank you. That concludes our question and answer session for today. I'd like to turn the conference back over to Paylocity for any closing comments..

Thank you very much, operator. I'd just like to take a moment to thank everyone on the phone today for your interest in Paylocity. And have to do a little bit of a cheer-out for their Cubs and their World Series championship year being headquartered in the Chicagoland area. Thank you very much, everybody..

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