Steve Beauchamp - President and Chief Executive Officer Ryan Glenn - Director of Finance and Investor Relations.

Justin Furby - William Blair & Company Vincent Celentano - Raymond James Nandan Amladi - Deutsche Bank Ross MacMillan - RBC Capital Markets Ken Wang - First Analysis Scott Berg - Needham Siti Panigrahi - Wells Fargo Ahbey Lamba - Mizuho Securities Brad Reback - Stifel Mark Marcon - Baird Trevor Upton - KeyBanc Capital Markets Patrick Walravens - JMP Securities.

Good day, ladies and gentlemen, and welcome to the Paylocity Holding Corporation Fourth Quarter 2017 Fiscal Year Results 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 follow at that time.

[Operator Instruction] And I would now like to introduce your host for today's conference, Mr. Ryan Glenn, Director of Finance and Investor Relations. Sir, you may begin. .

Good afternoon and welcome to Paylocity’s earnings results call for the fourth quarter and full fiscal year 2017, which ended on June 30, 2017. I’m Ryan Glenn, Director of Finance and Investor Relations, and joining me on the call today is Steve Beauchamp, CEO of Paylocity.

Today we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our Web site 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 under our Web site at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission.

The non-revenue financial measures we will discuss today are non-GAAP unless we state the measure as GAAP.

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

Steve and I will be attending the Deutsche Bank Technology Conference in Las Vegas on September 12. With that, let me turn the call over to Steve..

Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2017 year-end earnings call. We completed fiscal year 2017 with total revenue growth of 30% and total recurring revenue growth of 31.1%. We reached a significant revenue milestone as we crossed $300 million in total revenue for fiscal 2017.

Total revenue growth for the fourth quarter was 27.1%, which exceeded our guidance and was driven by a strong quarter of new sales. We also made significant progress in moving towards our long-term adjusted EBITDA goal of more than 20% of revenue.

We have consistently expanded adjusted EBITDA since our IPO in March 2014 and finished fiscal 2017 at 18.7% of revenue versus 12.3% of revenue in fiscal 2016, a 640 basis point improvement. Our growth formula continues to be driven by adding new clients to our platform and selling more products to each client.

We increased our total clients by 16%, finishing fiscal 2017 with 14,550 clients compared to 12,500 at the end of last fiscal year. Our average client size remains at approximately 120 employees as we focus on delivering the leading HCM software in service to the midmarket.

We increased average recurring revenue per client by 13% to 19,800 from 17,600 last fiscal year, primarily by selling more products, such as recruiting and expense to new clients. We also experienced some success in selling additional products back to the client base and we will continue to gradually expand those efforts over time.

Broker referrals continue to be a key sales driver, representing more than 25% of our new business revenue for fiscal 2017. As a reminder, broker referrals peaked at almost 40% in the second quarter of fiscal 2016 as clients rushed to implement ACA.

With referrals then decelerating during the first and second quarter of fiscal 2017, settling in at our pre-ACA historical levels for the past two quarters.

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

We continue to invest in our sales force by adding new sales reps, solutions consultants and managers, while at the same time investing in training initiatives and marketing programs. We have expanded the sales force by 25% this year from 205 sales reps in fiscal 2017 to 257 sales reps in fiscal 2018.

And I am pleased we are fully staffed to this number. Being fully staffed as we enter the fall selling season is a very important milestone to position us for a good start to the year. I also recently had the opportunity to spend time with a number of our experienced sales reps from across the country at some of our advanced training sessions.

I received very positive feedback on our investments in research and development and the impact it is having on our competitive position in the market. We increased our investment in research and development in fiscal 2017 by 22.4% when you consider what we expense and capitalize.

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

We remain focused on continued innovation and new product introduction in an effort to surpass the $300 per employee, per year milestone in fiscal 2018. We recently launched our latest offering, the Compliance Dashboard.

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

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

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

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

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

Additionally, we released a new modern take on the manager scheduler to increase supervisor productivity and automated the integration of time off request with Office 365, Gmail, and Slack. Throughout fiscal 2017, our operations teams focused on delivering a world class service experience to our nearly 15,000 clients.

While at the same time, implementing a number of new initiatives that will position Paylocity for greater scale as we continue to grow. Clients continue to rely on Paylocity for consultation and advice, making service an important of the value we deliver.

This combination of service and technology allowed us to once again deliver revenue retention of greater than 92% for fiscal 2017. We are very proud of Paylocity's culture and are honored to have won a number of best places to work awards this past fiscal year.

We have received very positive employee feedback from these surveys and on social media sites such as Glassdoor. And as you may recall, earlier this year we were honored to be named the number 14 best place to work in the 2017 Glassdoor employee's choice awards.

We believe strongly in creating a culture of transparency with open communication where people are empowered to make a difference and advance their carrier. I would like to thank our more than 2000 highly dedicated employees across the country for all of their efforts this past fiscal year.

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

Thanks, Steve. Turning our attention to the financial results. Total revenue for the quarter was $76.1 million which represents a 27.1% increase from the same period last year. Total revenue for the year was $300 million, up 30% from last fiscal year.

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

Recurring fees were up 26.6% while interest income increased by $0.4 million or 53.9%, primarily as a result of our client growth and balance increases, while we also saw an increase in average interest rates during the quarter. For the year, our total recurring revenue of $288.4 million was up 31.1% and represented 96% of our total revenue.

Implementation services and other revenue was $2.7 million for the fourth quarter, up 30.6% from the same period last year. Implementation services and other revenue was $11.6 million for the year, up 9.1% from last fiscal year.

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

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

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

Our adjusted gross profit on recurring revenues was $54.1 million, or 73.7% in the fourth quarter, up from $41.5 million or 71.9% in the prior year, 180 basis point improvement. Adjusted recurring gross profit was $214.8 million or 74.5% for fiscal year 2017, up from $161.2 million, or 73.2% in the year prior, a 130 basis point improvement.

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

In order to understand our overall investment in research and development, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total research and development investments were $10.4 million or 13.7% of revenue in the fourth quarter compared to $9.7 million or 16.1% in the year ago quarter.

Full year research and development investments were $39.4 million or 13.1% of revenue compared to $32.2 million or 14% of revenue in fiscal year 2016. On a dollar basis, our investment in total research and development increased by 22.4% in fiscal 2017 when compared to fiscal 2016.

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

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

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

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

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

Our adjusted EBITDA was $11.5 million or 15.1% of revenue for the quarter, versus $3.3 million or 5.4% of total revenue for the year ago quarter, a 970 basis point improvement. Our adjusted EBITDA for the year was $56.2 million, or 18.7% of total revenue versus $28.4 million or 12.3% of total revenue in the year prior, a 640 basis point increase.

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

Over the past two fiscal years combined, we have realized over 1300 basis points of leverage in adjusted EBITDA and while we do not forecast this level of leverage going forward, we continue to be confident in our ability to enter our stated range of 20% to 25% of revenue in the future.

For the fourth quarter, non-GAAP net income was $5.1 million or $0.09 per share, based on $54.5 million pro forma diluted and weighted average common shares outstanding. For the year, non-GAAP net income was $36 million or $0.67 per share based on $54.1 million diluted weighted average common shares outstanding. Briefly covering our GAAP results.

For the quarter gross profit was $42.9 million, operating loss was negative $3.4 million, and net loss was negative $3.8 million. And on a full year basis, gross profit was $176 million, operating income was $7.3 million, and net income was $6.7 million.

We continue to be pleased with the leverage we have been able to drive in our business model with fiscal 2017 being our first full year as a public company with GAAP net income. In regards to the balance sheet, we ended the year with cash and cash equivalents of $103.5 million.

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

Purchases of property and equipment were $21.3 million or 7.1% of revenue in fiscal 2017, which includes builds out related to the first phase of our new office space in the Chicagoland area. As noted on our last earnings call, we are expanding into a new Boise office and will continue to phase into additional space in Chicagoland.

As a result, we may see purchases of property and equipment trend towards the high end and possibly slightly above the 6% to 7% of annual revenue we have historically targeted. Finally, I would like to provide our financial guidance for the first quarter and full year of fiscal 2018.

I would note that we have not factored in any potential future federal reserve interest rate increases [indiscernible]. For the first quarter of fiscal 2018, total revenue is expected to be in the range of $80.3 million to $81.3 million, or approximately 24% to 25% growth over the first quarter of fiscal 2017.

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

And for the fiscal year 2018, total revenue is expected to be in the range of $368 million to $370 million, or approximately 20% growth over fiscal 2017.

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

In summary, we are very pleased with our operational performance during the fourth quarter and full fiscal year 2017. I would now like to turn the call back over to Steve before we begin the Q&A session..

It is with a heavy heart that we announce that Peter McGrail passed away last week. Peter's life was taken too early. He is survived by his wife Agnes, their four children, Katelyn, Mary, Thomas and Audrey, and of course his entire Paylocity family. Peter left an indelible mark on all that knew him.

His passing leaves each of us with a great void but great memories as well. As CFO, Peter played as big a role as anyone in making Paylocity the company it is today. He was instrumental in taking the company public in 2014 and was passionate about driving a learning and development culture across our organization.

We will always remember his wisdom, willingness to help anyone, genuineness, and this friendship. Operator, we are now ready for questions..

[Operator Instructions] Our first question comes from the line of Justin Furby with William Blair & Company. Your line is now open..

Congrats on the quarter and certainly my thoughts and prayers to Peter's family and to all of you. He will certainly be missed. I wanted to start, I guess, Steve with you and I was hoping you could give us feel for rep productivity trends that you saw this past year both with your mature reps and the new reps that joined a year ago.

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

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

So I was very happy with seeing the comeback that we had throughout the fiscal year. In terms of rep productivity, what I would tell you is there is no real big shifts, whether it's experience or newer reps, from what we have seen historically.

So we are still seeing the same type of mix, whether it's from our most experience folks or some of the newer folks that we have brought on. And then we really don’t necessarily have a different process to track somebody from the industry or someone that had industry experience at some point in their career versus some of the newer reps.

We have got a standardized on-boarding process and training process we really feel good about. So I would say we have hired both experience reps now, as well as some reps with business experience but not necessarily industry experience. So we feel really good about the hiring class that we brought on..

Okay. And then I guess just on the unit growth that decelerated this year, a fair amount now. I am wondering what are you seeing sort of medium-term, what the sustainable unit growth is and do you feel like to keep revenue growth at 20% or higher from here.

Does this require ARPU to become an even bigger weight-in on the typical sort of one-third ARPU growth and two-thirds units..

Yes. So I think the ratio hasn’t changed a lot so on 30% revenue growth we have maintained a pretty similar ratio. I think the important point here is, we don’t task our sales organization with specific unit targets.

They typically will try to sell as much product as the customer needs upfront and so it's always easier to sell a customer more product than it is to go get a new unit. So I think the incentives work where we are trying to maximize ARPU and then get the unit that we need to hit the numbers that we are looking for.

So I think we look at that more on a mix basis and so I think to continue to grow above 20%, we would like to keep a similar mix going forward..

Got it. And then just one more if I can, just on guidance on, I guess, the philosophy this year. Last year you guys set out a number for the full year and you had the broker channel slow quite a faster than you thought and you ended up beating that guide but maybe not as much as you would hope.

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

Yes. I don’t know if we have changed our guidance philosophy a lot. I think what I would tell you, the larger you get then it obviously gets a little bit harder to move the needle one way or another. And so that’s just really more economies of scale than anything. And so we feel like we have gone through a pretty consistent process.

Our guidance actually is pretty similar to what it's been the last few quarters. And so I don’t think we have changed our philosophy..

Thank you. And our next question comes from the line of Brian Peterson with Raymond James. Your line is now open..

This is Vince Celentano on for Brian. Steve, I was wondering if you could remind us, how are you thinking about the longer-term growth drivers as it relates to customer count versus your average ARPU and then how should we think about that playing out over time.

I don’t know, overall, what you think to be the larger contributor to growth in fiscal year '18..

Sure. So I think if you look at our history, you will see that the units has always been a little bit larger than the ARPU in terms of the impact on our total growth. Obviously, that was accentuated or maybe a little different when you look at the one year when ACA was first launched.

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

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

Okay. Perfect. And then going back to the sales headcount. I guess how did that end up coming in versus your planned count for fiscal year '17 and what are your expectations going into fiscal year '18..

Yes. So our process is, we start kind of in the late -- we start hiring in the spring and we finalize our numbers kind of in late Spring into early summer. And those numbers are based off what our revenue targets are looking at and what our productivity assumptions are.

So we did target the number 257 reps or 25% revenue growth and we are pretty pleased to be able to get fully staffed going into this fiscal year, which is really important for us. Because as you know, the fall selling season is a pretty important time because we do get a higher proportion of our overall business in that January start timeframe.

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

Thank you. And our next question comes from the line of Nandan Amladi with Deutsche Bank. Your line is now open..

My condolences to you and also to Peter's family. The question on the brokers, with the uncertainty around the Affordable Care Act for the last six months or so, I am surprised to see that the broker mix actually went back down.

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

Yes. So I would just kind of recast in terms of how we have guided for brokers. So brokers, when we went public, were more than 25% of our revenue and that’s a more than number that we give. We increased that more than number to 30% plus as ACA was kind of entering into the market and we also indicated that that actually peaked in the high 30s.

And so what we saw these last two quarters is that return to that 25% plus, which is what it had been historically. So I wouldn’t say, it certainly had gone down from the front part of the year, but is not down versus where we have been historically. It's very consistent..

Okay. And then in your script you mentioned some up selling to the base as part of the ARPU growth. How much is left to up sell or how early are you in that process? Clearly your focus will be on adding new units as you just mentioned before, but maybe talk about the mix as it stands and what's your target as for the next couple of years..

Sure. I think our view is that we would still see new client sales and selling new clients more of our products as our primary revenue driver. I think ACA created an opportunity for us to start selling some back to our client base. We staffed a small team with that. We have gradually expanded that.

We have also seen some of our sales reps as we introduced new products. Being asked about those from our clients and certainly we want to be able to help clients as we continue to introduce new products. So I think naturally we would just see that gradually grow every year but not necessarily be the driver of revenue, just be additive..

Thank you. And our next question comes from the line of Ross MacMillan with Royal Bank of Canada. Your line is now open..

My condolences as well to the Paylocity team and Peter's family. Steve, I had two questions. First, obviously the average recurring revenue declines is mostly driven by sales of more modules into new customers. But as the base gets bigger, it clearly gets harder to drive the same percentage change in that.

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

Yes. What I would tell you is we don’t necessarily task the sales force on inside sales, back to the client base versus outside. We have a small team that’s dedicated to that effort. What I will tell you is that small team will not necessarily drive the needle.

For us to really shift, our sales force would have to get much more engaged with our customers, which is not something that we are necessarily focused on. It has happened more over time as the base has got bigger. So our view is this trend will just continue and our primary driver will still be new sales to new clients..

Okay. That’s helpful. And then just on productivity, I guess, measured by the number of new customers signed for quota-carrying rep in the last 12 months. That was obviously down, maybe more significantly than it was seen but we know also that the first two quarters of the year were difficult from a comp standpoint in that kind of post-ACA air pocket.

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

Yes. I think productivity per sales rep is something we look at. We are primarily focused on average revenue per sales rep that they sell versus the number of units. I think it really just depends on the mix.

As we continue to add more product and we get higher penetration rates, then the reps can actually sell a little bit less units and get more revenue per unit and still have productivity. So I think the way we think about that mix is as long as we are getting the average productivity we are looking for, it doesn’t really matter to us too much.

And if they sell one less unit but a lot more product, we are fine with that..

That’s great. Maybe just one last one.

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

Yes. So what I would tell you is we don’t pre-announce product availability and so we actually have it in the marketplace. You will see in my prepared remarks, I indicated that we feel confident this fiscal year we can get ourselves above the $300 per employee per year.

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

Thank you. And our next question comes from the line of Corey Greendale with First Analysis. Your line is now open..

Thank you. This is Ken Wang on for Corey. First off, I would just like to express my condolences to Peter's family as well as the team at Paylocity. So just wondering, have you seen any changes in competitor behavior over the past quarter? Has it become any easier or more difficult to win customers away from competitors..

No, I would say, beyond the past quarter, I would say we hadn't seen a whole lot of competitive change this past year. We obviously got a little less referrals in the front half of the year versus last year from brokers but that really wasn’t necessarily a competitive dynamic.

So we are seeing the same amount of business from the large traditional service bureaus that we have gotten historically, and then we continue to see regional competitors, most significantly, Next. And so I wouldn’t say anything has really changed..

Okay. Thanks. And just from a sales person hiring perspective.

Any change in competition there or difficulty hiring?.

No. I would just say as we hire more reps every year, certainly finding talent is always one of the key challenges that we are focused on. We do actually recruit all of those sales reps ourselves. We got a pretty large internal recruiting team and they are working prospective sales reps throughout the year.

That really allows us to execute a large number of hires in a relatively short period of time. So I was pretty pleased with us being able to hit the target number of reps when we are adding more than 50 reps this year..

Perfect. And just one last one from me. Can you offer any color on potentially any expense items you expect to scale more in 2018..

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

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

So at this point we are looking at kind of 60 to 80 basis points of leverage and I think the way we have talked about this is, on average we would expect about 200 basis points per year but coming off a year like fiscal '17, where we got over 600 in fiscal '16, but we also got over 600.

We will take some opportunities to potentially invest in certain areas, as we want to make some of those investments given how quickly we have ramped specifically on adjusted EBITDA.

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

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

Thank you. And our next question comes from the line of [Eric Sema] [ph] with SunTrust Robinson Humphrey. Your line is now open..

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

But now looking at the intermediate term prior to reaching your long-term goals with EBITDA margin targets, would you say the market is kind of guiding you guys along with your strategy to low to mid-20% growth now that we lapsed the one time issues of ACA. So are we at the end of new normal, lower to mid-20% growth..

I have to say, it's hard for us to know that. We haven't really kind of normalized growth. If you think about this year, it was 30% for us off of really touch compare with ACA prior. And so now we are guiding to midpoints, about 23% revenue growth.

Our goal would be to able to maintain 20% plus revenue growth, that’s certainly part of our long-term model. So the fact that we are guiding to 23% gives you a sense we are certainly closer to that target..

Okay. Helpful. And then on some of your newer products, expense management recruiting. How are the adoption rates for -- or attach rates for new customers and are those some of the products that are being sold back into the customer base..

So, yes, when we have a new product introduction, we do introduce that back to our customer base and we certainly wouldn’t want a customer not to know about a product that we may have available to them. So that’s certainly part of our process and we do have some up sells back to our clients for those two products specifically.

We have been pretty pleased with both of those. I would say, recruiting and expense have got off to a great start for us. We are seeing some penetration rates in line with what we would have expected back to the new clients.

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

Thank you. And our next question comes from Scott Berg with Needham & Company. Your line is now open..

Congrats on the fantastic quarter and again I would certainly extent my condolences to the Paylocity family. Most of my questions have been answered but one quick on the financial side.

You had a pretty significant non-GAAP EPS, so was curious to know, on the expenses in the quarter, did any expense shift into the first half of next year or did those just kind of fall in line with your expectations..

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

And then as we started to retain momentum on the back half of the year, we started the investment cycle again in terms of our many of our teams to support the volume that you are looking for. So you do certainly feel little bit of a lag that way.

And so I wouldn’t say there is anything that pushed from one quarter to the next, it's just you are kind of catching up to the volume as it comes in. We feel like we have got the right investments lined up in the guidance that we have provided for the year..

Thank you. And our next question comes from the line of Siti Panigrahi with Wells Fargo. Your line is now open..

I also extend my condolences to the Paylocity family. When I look at your Q4 sequential guidance and a sequential revenue decline, it's almost in line with your average, almost 15% to 16%. But your guidance for Q1 implies a sequential increase of 6%, that's kind of way below average of 10% and in the last year Q1 around 9%.

So I am wondering, is there anything that you have seen in July that’s sort of any trend that you are seeing for you to guide this way, or is that some kind of conservatism baked into that..

So I would say, I wouldn’t highlight any trends, specifically, that’s kind of gone into that guidance. We look at the year and then obviously we look at how we think the business is going to come in throughout the year and then provide guidance based off of that.

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

Yes. I guess the only thing that I would add is, if you look at our quarterly guidance, I think the last three quarters we have guiding kind of in this range 22%, 23%, 24%. I think if you do the math on Q1, it's 24% to 25%. So the philosophy has been pretty consistent, I think, the last three or four quarters..

Okay. And then for the FY '18, for the full year, I know that you guys talked about almost 7% revenue contribution from ACA. Have you baked in any kind of ACA contribution for this year..

Yes. So what I would tell you is, we have baked in what we think is a reasonable ACA contribution from this year. One of the things that we have also done in my prepared remarks I talked about our compliance product where we are starting to extend the value proposition of a compliance tool beyond just ACA.

And so that product embeds ACA along with other capabilities for our customers from a compliance perspective. And so I think overtime our goal would be that we would have a compliance suite that people are paying for, which we think potentially de-risks us as well from an ACA..

Thank you. And our next question comes from the line of Ahbey Lamba with Mizuho Securities..

We extend our condolences to the Paylocity family as well. Steve, talking about your revenue guide for fiscal '18, you have a sales capacity increase of 25% but your revenue growth expectations at 23%.

Can you talk about productivity enhancements or what kind of reduction in productivity are you baking in in terms of your guidance and how should we expect the growth between recurring versus non-recurring revenues next year..

Okay. So we don’t necessarily break out the non-recurring versus recurring in terms of what our guidance is. I think it's a little bit more complicated of a formula than just looking at the number of reps and then looking at the revenue guide.

So what I mean by that is it's a recurring business so the amount of revenue sold last year effects as much as what you have sold this year overall. In addition, the clients can grow a little bit. There is a small pricing component to this. And then there is a loss rate. And so the reality is you have got to sell on top of that loss rate.

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

I think overall from rep productivity perspective, we didn’t get the productivity we looked at the first half of last year, we did get some significant improvements in the back half of the year and we have tried to incorporate what we think is a reasonable assumption going into this year and we feel good about the recent momentum that we have got in the last quarter..

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

Have you kind of considered some of those channels and is that some of that expansion baked into your plans for fiscal '18?.

So we certainly look at other channel opportunities. We feel like the broker channel most aligns to the customer segment that we are going after.

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

We just don’t necessarily think that the market overlap would yield the same type of results at the broker channel. So that’s not necessarily a focus going into next fiscal year..

Thank you. And our next question comes from the line of Brad Reback with Stifel. Your line is now open..

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

I don’t recall that specifically but it was in the neighborhood of about $850 million to $900 million in the fourth quarter..

Great.

So basically a 25 bps increase there gets you another $2 million-$2.5 million on the top line?.

I think the way to think about that is -- you got the right concept, but it doesn’t necessarily layer in that way. We have a large number of banking relationships that we then have to work with them to see what we can do in terms of realizing that rate increase. It always takes a little longer for us to be able to get that rate increase.

But the concept is the right one, which is, if you are getting 25 basis points over maybe an extended period of time, you could potentially realize most of the benefit from that. You just don’t necessarily get it right away. It takes a little bit of time for us to work each of our relationships out..

Thank you. And our next question comes from the line of Mark Marcon with Baird. Your line is now open..

First, my condolences as well to Peter's family as well as the Paylocity family. Two sets of questions. One, recurring gross margin looked like it was better than what we were anticipating.

Are you expecting -- was there anything unusual with regards to that in this particular quarter and would you anticipate that same level of scale coming through in the plans for the coming year..

Sure. I would say, there is nothing unusual. As I called out a little bit earlier, we certainly started making more investment in the back half of the year to keep up with the volume that we were kind of seeing and probably didn’t see all of that in that fourth quarter. We did see some of that happening in the first quarter.

Certainly would probably be the only real callout. We do try to focus on overall gross margin expansion and so certainly part of the guidance that we have would imply some level of expansion next fiscal year..

Great. From a sales perspective, three questions. One is, which modules are you seeing the highest attach rates with in terms of the new sales now? Secondly from a competitive takeaway perspective, did you comment with regards to whether it's still ADP and Paychex, in that order or vice versa.

And if there is anybody else that you are starting to gain traction relative to. And then thirdly, as you go into the back half of this year, it sounds like you are all set for the fall selling season but as we go into the back half of the fiscal year, what are you envisioning in terms of sales force expansion. Thank you..

Yes. I think it's a little early for us to think about sales force expansion on the back half of the year. That’s something that we would target post year-end. It's obviously pretty important time of the year from a sales perspective. I think on the first part of your question which is, which modules are we selling the most.

I would say we still continue to see clients by payroll and HR in combination, add time and labor next, but I would say we probably see, from a growth perspective, more growth in the benefit and talent management category. That’s been pretty consistent for us over the last couple of years.

And then from a competitive perspective, we still see ADP and Paychex in that or makeup approximately 50% of our new business. So no changes there. And the only other change you might have from a mix perspective is, I think, we called it earlier in the year that in-house had kind of gone down to its historical levels as well.

At the peak it was in the high teens and now we see it more kind of in the mid to lower teens. But other than that there is no real competitive callouts..

Thank you. And our next question comes from the line of Trevor Upton with KeyBanc Capital Markets. your line is now open..

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

With respect to selling more products, have you seen any change in either implementation times or sales cycles?.

I would say that we haven't necessarily seen a big change. I think I highlighted a bit earlier that we do see that customers are looking to buy more product. They are looking for a fairly simplified pricing schedule to make that decision. They like to make these decisions in bundles.

I think that’s generally a very positive trend for us as we continue to broaden our portfolio. Our implementation times have typically been kind of in this three to six week timeframe and there is times where customers might want to schedule some of the other modules a little bit later but if they are up for it, we can get them up pretty quickly.

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

All right. And the just a quick question. Payroll as a percentage of revenue, I know you called out that you have passed a milestone last year.

Do you have any update?.

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

Thank you. And our next question comes from the line of Pat Walravens with JMP Group. Your line is now open..

My deepest sympathies. He was a, I would say he was a consonant professional and he never had an unkind world for me. We will miss him. My question is big picture, which is I think investors, they just wonder, you guys are doing so well and so is Ultimate and Paycom and Paycor.

So how should we think about and presumably this is coming at the expense of [indiscernible] in an ADP and Paychex. How long can this continue? Just love to hear your big picture thoughts on that..

So I think we, taking a big picture view of it, it's still a very large market dominated by two of the large traditional payroll providers where we have gotten half our business from. And so with nearly 15,000 clients in a market with over 600,000 prospects, it's a pretty small penetration rate. And so in-house is still a fairly large category.

Regional payroll providers still make up a fairly large category and then ADP and Paychex also have a significant number of customers. And so we think the real macro trend here is, clients are looking for an efficient, modern platform that really allows them to engage in a very much a changing workforce.

And I don’t think that trend is slowing down at all. In fact I think as the workforce gets younger, there is even more demand for a much more modern platform and because of that trend, we think that there is still a pretty significant runway in front of us..

Thank you. And I am showing no further questions at this time. I would like to return the call to Mr. Steve Beauchamp for any closing remarks..

Well, I would like to thank all of you for joining us and your interest in Paylocity. I would also like to thank you for all your kind words for Peter and his family. They are deep in our thoughts and he would definitely be missed. Thank you very much..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great day..