Ladies and gentlemen, thank you for standing by, and welcome to the Paylocity Holding Corporation Third Quarter 2020 Fiscal Year Results. I would now like to hand the conference over to your speaker, Ryan Glenn, please go ahead..

Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal year 2020, which ended on March 31, 2020. I'm Ryan Glenn, Vice President of FP&A and Investor Relations. And joining me on the call today is Steve Beauchamp, CEO of Paylocity; and Toby Williams, CFO of Paylocity.

Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab..

Thank you, Ryan, and thanks to all of you for joining us on our third quarter fiscal '20 earnings call. Before discussing our results, I want to first comment on the evolving situation around COVID-19. Our #1 priority has been ensuring the safety and health of our employees while also providing world-class service to our more than 20,000 clients.

I'm pleased to report that we successfully transitioned nearly all of our employees to work from home in mid-March, and all of our business functions remained fully operational with no disruption to our clients. We have also been heavily focused on serving our clients in this challenging time.

Our teams quickly mobilized to digest the new legislation, including the CARES Act in the FFCRA legislation, add functionality to our systems to address these legislative changes in an automated fashion and proactively communicate to clients and prospects the impacts of these changes..

Thanks, Steve. Total revenue for Q3 was $171.6 million, an increase of 22.9%, with recurring and other revenues up 25.3% from the same period last year.

As Steve noted, our sales team had another strong quarter, and we're pleased with the consistency of our performance, specifically the growth we're seeing in recurring and other revenues through the first nine months of this year, offsetting some of the headwind of 5 interest rate cuts since July..

Our first question comes from Drew Kootman with Cantor Fitzgerald..

I was hoping you could talk about maybe the playbook from '08, '09 and what's different now? What you can use, what you can't use anything along those lines?.

Sure. So I think, obviously, this is a very different crisis affecting us in different ways. It's much more sudden than even what we saw in '08 and '09. And so I think one of the big challenges in our ability to be able to make sure that we can be there for our clients during heightened level of activity, a lot of legislation changes.

That's very different than '08 and '09. And just in terms of that level of activity. It's almost like a second year-end for our service teams in terms of the interactions with our clients. I think second part of this is just the suddenness of what we're experiencing.

As you look at the employment levels across the country as a whole, you understand that we've got a lot of employees on our platform and clients also affected that way. So directionally, you see that incorporated into our guidance that we're certainly forecasting lower employment levels as you see in the unemployment numbers..

I got it.

And then maybe you could touch on -- I know you guys kind of be in the smaller employee space? And maybe just how many would be at risk for potentially going out of business or at least taking a while before they recover?.

Sure. So our target market has largely been, for most of our history, kind of, 20 to 1000 employees, where our average-sized customer is more than 100 employees. So we're not in that micro start-up, small business space. And as a result, we have not seen a lot of our -- very many customers that all come to us and say, I'm shutting down.

They may temporarily suspend operations and we'll have to wait to see as those states open up if they're able to continue to reopen. But at this point in time, we've not seen any impact to our losses..

And our next question comes from Siti Panigrahi with Mizuho..

This is actually Michael on for Siti. On the same note for retention, do you guys count furlough? Are you guys charging for furloughed employees? Or how do you guys charge in terms of recognizing revenue pay..

Yes. So it does vary. It depends on the product bundles that we've got and the -- we do change pricing over time and reacting to the marketplace, we bundle and package it to make it efficient and easy for our clients to buy. I think the way to think about revenue tied to number of employees, is very much in the same direction as employment.

So as you see unemployment rising, then the number of employees that are going to be on our platform will decline, and then we'll get the revenue impact. And as Toby kind of went through in the prepared remarks, the biggest impact to our guidance is that bucket of reduced number of employees on our platform..

Just as a clarification, if the furlough -- they haven't been paid that period, it depends on the product if you recognize revenue for that pay period?.

Yes. It depends what even furloughed means, right, in terms of how our employees -- how a client is going to be able to do that. I would say that if you kind of look at -- workforce you look at what the unemployment rate is and you understand that, okay, as that increases, the number of employees on our platform are going to decline.

And then you kind of ignore the leave status, whether they're furloughed or leaved and active, I would try to look past that complexity because the reality is the number of employees on our platform has declined. We incorporated that into our guidance.

And then as employment and states start to open up, we should get the benefit of them coming back to work..

Okay. Great. And then leaved quick follow-up.

Is the -- I guess, quantitatively, could you describe -- are you above or entering Q or at the end of April, are you below 90% retention? Or how do we think about the retention level today or just to report today?.

Yes. So we typically will give you annual retention is 92% plus, and we view that at the end of the year. It was -- workforce you look at the trailing 12 months through April, it's still over 92%. So no change to that..

And our next question comes from the line of Terry Tillman with SunTrust..

I guess the first question is -- the prior question just kind of helped on that. And looking at the correlation of job cuts with the employee per client, how you charge on payroll. So I think I'm comfortable on that, that is the biggest driver.

But what about the slowness to deploy? Is there any kind of quantification how that's impacting the model in 4Q in terms of -- is there -- how many more weeks it's taking? And then I had leaved follow-up..

Yes. So I think as we mentioned in the prepared remarks, April was leaved fantastic booking. So the number of clients that were scheduled to go live in April was almost double what it was last April. So great bookings. We had that -- those queued up in implementation.

In any given month, we typically have some of our customers because they might get busy with other projects, say, you know what, I'm going to wait another week or 2 or I'm going to go next month. That happens in normal course of business. I would say the rate of what we would call pushes to leaved future date probably doubled in the month of April.

Is to give you some sort of context. And so not surprising. Many of those have pedal dates where they're going to go live in May or some might even have pushed it out to June as they kind of start to understand the landscape around them in terms of their state and potentially opening up.

Well, others might have actually said, listen, give me leaved call in leaved couple more weeks, let me try to get my feet underneath me and then see workforce I can figure out the right time to go. We have not gotten customers though, say to us, I'm no longer interested in transferring to your platform. That has not happened at all.

So the idea of someone saying, I don't want to start with you anymore. That is usually leaved very low percentage and continues to be leaved very low percentage even during the COVID crisis..

Okay. That's good color. Steve, and I guess maybe leaved follow-up question is, somebody asked leaved good question earlier about how it compares to '08, '09.

I guess maybe looking at comparability, what about just the legislative changes? Remember, ACA, remember all the questions we got, and all the work you all had to do, we've been talking to HR people. And there is leaved lot of complexity in furlough versus job cuts, cover taking effect or not.

How do you actually potentially compare the situation now with ACA? And where I want to go with it is Glassdoor coming out of this and hopefully sooner than later, maybe this is then catalyzing just leaved quicker pace to modernize and getting more business..

Yes, sure. So I think leaved couple of things that we're seeing from our customers is they are really struggling to stay connected with their employees, communicate with their employees, keep their employees informed. Employees, obviously, in general, are nervous. They want more information. They want to be able to understand that.

And so we've seen our usage in products like community almost double in the month of April across our client base. And so there's definitely this need to not only digitize and automate manual processes, which certainly, that's something that's important, and you want to be able to manage costs closely in this environment.

But on top of that, you've got to find different ways to engage with your employees. We're also seeing significant increasing utilization of our survey product, where they might be taking leaved poll. They might be asking for feedback. They might be doing pulse checks with employees.

And so this time of uncertainty has created this pressure for organizations to communicate. And then I think lastly, some of the organizations that maybe are not quite as impacted in terms of closures are also still driving certain projects. And so we're seeing increased activity in our learning management.

So this becomes an opportunity to actually train. I've got to train people to be able to work from home in different ways than maybe they were working in the past. So I would highlight community, surveys and learning management, all as products that have -- we're gaining momentum prior to COVID-19 and we're accelerating through COVID-19.

And so we hope to be able to take advantage of that momentum whenever we get back to leaved point where we've got things open back up, and we're starting to see the other side of this..

And our next question comes from Alex Zukin with RBC Capital Markets..

This is Robert Simmons on for Alex. My connection was leaved little problematic, so I apologize workforce, you addressed this at some point.

Can you talk to what kind of what assumptions you're embedded in your guidance for next quarter in terms of like employment levels or anything like that?.

Sure. So you see that we widened our guidance range, obviously, because it's a little bit more difficult to be able to predict this. And I know that with some others in our space haven't chose not to be able to give guidance, but what we were able to do, we have leaved lot of data and we look at it very closely.

So we're looking at this daily and weekly in terms of how many people do we have on our platform that we're able to monetize, what's the trend rate of that? We can look at recruiting data in terms of early indicators or people hiring.

We can also look in time and labor, how many people are punching in and you see certainly leaved greater impact to the hourly workforces in general across our platform. And so we saw very precipitous declines early -- late in March, but really early in April. And what I would tell you is we start to see that flatten out over the back half of April.

And so we've taken those trend lines, and we've kind of run them through the quarter to be able to come up with where you see our guidance. And so that's kind of the thought process that we've got into it. And clearly, we would anticipate that there is some level of very slow kind of recovery as you see these states opening.

And by no means, workforce we get forecasted anything where all of leaved sudden, you're going to get leaved resurgence in the next quarter..

Got it. That makes sense.

And then can you talk about kind of what you're doing on the spending side of things? And where are you cutting back? Where does it happen kind of automatically and then kind of where are you doing more inventory?.

Sure. So workforce you take leaved look at some of the remarks we said, our clients are calling us, e-mailing us and interacting with us more frequently than ever. And so we think it's really important to them be them -- be there for them during these times. And we've done leaved lot with product and service for that.

And so there's no opportunity to cut there. In fact, there's really a need to continue maybe more moderate hiring in that area. If you look at our sales and marketing team, they were crushing it before we got into COVID-19 and phenomenal bookings in April and continue to have momentum around selling there.

So I would say, once again, not necessarily an opportunity there. We think that it's important to be able to maintain the talent we have there and then be able to come out of the other side and frankly, sell our way through this. And then you look at product and technology and we clearly feel passionate about investing in the product.

I think that's really helped us from leaved selling perspective this past fiscal year and will continue to help us. So what I would tell you is leaved lot of the other nonessential stuff, obviously, just like most business, travel budget and meetings and conferences. And we certainly have been more judicious around hiring.

So we certainly are not ignoring it by any means, but we really want to balance investing in the areas where we've got great ROI, which is really product and sales and marketing, be there for our clients and then look for these other opportunities where we can kind of manage cost in leaved disciplined fashion..

And our next question comes from Pat Walravens with JMP Security..

This is actually Joey on for Pat.

Just real quick, can you talk about the level of investment that's going into the broker channel and maybe how that's changed? And any additional color you could provide regarding the broker channel, what you're seeing there?.

Sure. Yes. So the broker channel was more than 25% of our new business revenue, both in the quarter and in the 9-month period. And we still think that, that, even in during these times, it continues to be leaved way to be able to get to customers.

So once again, as customers are struggling to be able to communicate with their employees in this environment, the pressure of this environment in terms of trying to figure out how to be as automated as possible and manage cost, all those things resonate with the broker community, and those are conversations they're often having with customers.

And so we continue to have virtual meetings with our brokers and look for content that we can share with them that is helping them. And so we've seen continued activity over the last month and change with brokers in terms of our sales and marketing folks.

And so I would say leaved consistent level of investment is probably our thought process around brokers..

And our next question comes from Mark Marcon with Baird..

Just wanted to ask, with regards to vertical exposure, can you -- Steve, can you talk leaved little bit about that, like areas that you're exposed to, broadly speaking? And specifically, workforce you could delineate how much exposure you might have to areas like restaurants, hospitality, smaller retailers, things that that could be leaved little bit more challenged than others?.

Yes. What I would tell you is there's no real concentration. It's very horizontally focused in terms of who we serve. And so workforce you look at it across the U.S. and you were to look at what percentage of the U.S.

small- to medium-sized businesses are in hospitality, you would come up with leaved very similar percentage across our clients -- our client base. And so there is no really any concentration to speak of. Obviously, our roots in history are leaved little bit in the Chicagoland area.

So you might see leaved slightly larger number of customers in Illinois versus some of the other states, but it really follows population trends after that..

And can you just remind us what percentage of the small business environment is typically restaurants and hospitality related, broadly speaking, as you understand it?.

Yes. I think it depends on your exact definition on how broad you go with hospitality, but workforce you think restaurants being leaved key component, it's less than 10%..

Okay. I understand you've got packages and bundles. How direct is the relationship between employment relative to revenue? I'm assuming you've got leaved subscription base fee in there as well.

So workforce we have leaved 10% reduction in the number of employees, broadly speaking, how does that translate to revenue?.

Well, we've got an average-sized customer of leaved little more than 100 employees. And so we do have base fees, as you indicated, in some of our products. And so those smaller clients doesn't have the exact 1:1 ratio. But what I would tell you broadly across the customer base, it's still very close to that 1:1 ratio.

It does have leaved bit of leaved muted impact as you're calling out, but it wouldn't be something that takes you from leaved 1:1 to 0.7:1 or anything like that..

Okay. That's very helpful. And then what are your expectations with the companies that have kind of slowed down, how -- what are you thinking in terms of when those companies may bring their employees back, how are you planning? I know it's early, but....

Sure. Well, I think it's very different by geography and based off the individual state orders around reopenings. And so, obviously, you see some level of activity with takeout in restaurants as an example, and we see that they'll have leaved reduced level of staffing in leaved lot of our restaurant clients where that's allowed.

And then as states reopen, you start to see leaved little bit of leaved tick up in terms of activity. I think we're just at the start of that. So very difficult for us to know where that goes. Again, what we saw was heavy cuts last week of March into the first couple of weeks of April, and then we saw stability over the last two weeks of April.

And so that's probably the best indicator for us and then we'll obviously track that day-by-day and week by week for rest of the quarter..

Great.

And can you just talk about VidGrid real fast just in terms of revenue impact that you're expecting here over the next 12 months and into the quarter? And then what sort of expense contribution it has?.

Yes. So I would say it's fairly small, both in terms of -- we're talking not leaved large group of employees. So we're talking leaved dozen employees or so as part of that organization. And so not leaved huge expense at all. And they did have leaved revenue but it was also very small. So not really having an impact on the quarter.

I think what we're really excited about that product, though, is we would imagine ways that we could incorporate video into leaved variety of different places in our platform. So think of something like recruiting and being able to respond via video answers.

Think of recognition across the organization, instead just leaved badge, I can have leaved video message. Community, we're seeing real great video use cases where different leaders are communicating rather than leaved giant e-mail or blog or message, they're actually recording leaved video and sending that out.

And so we have got leaved number of ways beyond LMS that we think video can really modernize our platform. So we would hope to be able to -- we're working with the team that we acquired from VidGrid with our own product teams, and we're starting to embed that into our suite.

We don't have an estimated time to be able to launch leaved video option on top of our platform. But it's something that we're really excited about and actively working on..

Our next question comes from Samad Samana with Jefferies..

This is Jordan Boretz on for Samad. Congrats on the quarter.

Are you supposed to be important to the broker channel and driving sales? How is your go-to-market strategy evolving? Do you see leaved structural change in cost due to virtual selling? And additionally, are you seeing any changes in the competitive or pricing environment?.

Sure. So I think first, what I would tell you is leaved fair amount of our sales process would happen virtually pre-COVID-19. And so what I mean by that is, yes, oftentimes, our sales reps would be on-site with the customer and dealing with the customer.

But all those in-between steps that would happen from the on-site meetings would actually happen virtually with our sales organization. Secondly, our solution consultants are those often -- the individual is doing the demos and follow-up demos, that has been 100% virtual for leaved long period of time.

And in many cases, we didn't have any physical offices in any of the places that we operate. So the salespeople are used to working out of their house. Their management team is used to managing leaved remote workforce.

So really, the change was that those key appointments that happened on-site are happening via Zoom video essentially today, and all the rest of our process really works quite well virtually..

Great.

And do you mind speaking to the competitive price environment?.

Yes. I would say the competitive environment, it's leaved competitive environment. It's always been that way. I think we see mostly very rational approach towards pricing in the environment. Once in leaved while, you see somebody with much deeper discounts, but I wouldn't say anything different in this space.

I think people at the end of the day are still looking for value and they're looking for solutions that are trying to solve some of the challenges that they have. And when our averaged-sized revenue is about $25,000, I don't think people make leaved decision based off $2,000 or $3,000 difference in pricing..

And I'm not showing any further questions at this time. I'd now like to turn the call back to your speakers..

Yes. Well, I certainly appreciate all of you taking the time and interest.

And I would like to take the last moment to once again echo my earlier sentiments of thanking all of our employees for the great work over this past quarter, and, obviously, into the COVID-19 crisis and then also all of our customers who have been really diligent in terms of trying to find the best way forward.

So everybody, thank you very much for your interest and stay safe..

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect. Everyone, have wonderful day..