Q2 2020 Earnings Call
[music].
Good afternoon, and welcome to pay lots of these earnings results call for the second quarter fiscal year 2020, which ended on December 31st do you think.
As a 19 I'm wrangling, vice president of S.P., and eight Investor Relations and joining me on the call today, STI Beauchamp CEO of pay Laci and Toby Williams CFO of pay Laci today, we will be discussing the results announced in our press release issued after the market closed.
A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.
Before beginning we must caution you that today's remarks, including statements made during the question 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 or.
So these statements are based solely on the president information and are subject to risks and uncertainties that can cause actual results could differ materially from those projected in the forward looking statements for additional information. Please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures we.
Do not undertake any duty to update any forward looking statements.
Also during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business and there's a reconciliation schedule detailing. These results currently available in our press release, which is located on our website at pay lastly, dotcom under the Investor Relations tab.
Bob and filed with the Securities and Exchange Commission.
Please note that we are unable to reconcile any forward looking non-GAAP financial measure for the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.
In regard to our upcoming conference schedule, Steve will attend the JMP Technology conference in San Francisco on February 24th Toby and I will be attending the Raymond James Institutional investors conference in Orlando on March 3rd and I will be attending the RBC. One on one software conference in New York on March 12.
Let me know if you'd like to scheduled time with us at any of these events with that let me turn the call over to Steve.
Thank you Ryan and thanks to all of you for joining us on our second quarter fiscal 2020 earnings call are strong and consistent revenue growth continued in the second quarter led by recurring and other revenue growth of 24.6%.
We had another very strong sales quarter throughout our target market and we're pleased to be able to raise fiscal 2000 total revenue guidance by 5 million. Despite the headwind of three interest rate cuts since July.
We continue to invest in sales and marketing initiatives to drive growth and through the first half of the fiscal year. Our sales team is off to their best start in quite some time similar to last year, we continue to see unit strength coming from clients with under 50 employees as well as healthy momentum in the core and upper end of our market.
General Girls once again represented more than 25% of new business for the second quarter.
Adjusted EBITDA for the second quarter was 30.3 million or 22.9% margin and we continue to drive leverage in gross margin and DNA costs, well, we remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal 2000 to drive growth.
Our sustained investment in product development continues to pay dividends in the marketplace with our product suite being a differentiator versus our competition.
We continue to receive strong feedback on community our employee focus social communication platform designed for clients to increase employee connection engagement and productivity.
Monthly average users continue to increase and clients have found community helpful. In communicating to their employees on a wide variety of topics such as benefit open enrollment and company event.
More than half our clients using community have also taken advantage of our groups feature in order to increased collaboration and drive cultural initiatives.
In addition, we've been very pleased with the utilization of community by our clients employees with more than 15000 posts and over 100000 reactions to content just in this last quarter.
Our commitment to providing innovative software like community and on demand pay that appeals to the modern workforce is also evident in our adoption toolkit.
Which continue to gain traction with prospects and existing clients.
The toolkits help clients adopt enrolled at our solutions I understand common use cases and drive employee engagement across the platform.
Our adoption tool kits provide clients with everything they need to plan configured and launch our products, including instructional videos and expert guidance on product utilization best practices and product rollout strategies.
The positive feedback we receive from prospects and clients continues to be confirmed by third party research as Paylocity is once again been named an overall leader in 10 product categories in G. Twos Winter 2020 grid report, including being named a leader in payroll for the enterprise segment for the first time.
The second fiscal quarter is a very busy time of year for our operations employees as they work closely with clients on year end processing of payrolls W. Twos, 10, 90, fives and annual tax form filing to federal state and local agencies I want to thank all of our employees for their hard work and dedication during this very busy time of year.
I would now like to pass the call to Toby to review the quarter's results in detail and provide updated guidance.
Thanks, Steve total revenue for Q2 was $132.4 million, an increase of 23.4% with recurring and other revenues up 24.6% 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 in.
Both Q1 in Q2 offsetting some of the headwind of three interest rate cuts in July.
Our adjusted gross profit was 70.3% for Q2, an increase of 50 basis points from the same period in the prior year as we continue to focus on driving scale in our business model, while also adding operational resources to handle the increased client volume, resulting from a strong start by our salesforce in fiscal 2000.
We continue to make significant investments in research and development and to understand our overall investment in R&D. It is important to combine both what we expense and what we capitalize.
On a combined non-GAAP basis total R&D investments were 14.4% of revenue in Q2 and on a dollar basis, our year over year investment in total R&D increased by 20.9%.
On a non-GAAP basis sales and marketing expenses were 25.6% of revenue in Q2, reflecting the strength of the sales performance in the first half of fiscal 20.
On a non-GAAP basis, Gionee costs were 14.9% of revenue in Q2 versus 15.7% in Q2 of last fiscal year, and 80 basis point improvement and we remain focused on consistently leveraging our DNA expenses on an annual basis.
Adjusted EBITDA for the second quarter was $30.3 million or 22.9% margin as compared to our guidance of 30 to 31 million. While we're pleased to deliver in the range and continue to focus on driving leverage we did see margin headwind in the quarter from the lower interest rate environment and from higher sales expenses associated with our strong sales performance.
During our GAAP results for the quarter gross profit was 87 million operating income was 6.1 million and net income was 5.5 million.
In regard to the balance sheet, we ended the quarter with cash cash equivalents and invested corporate cash of $152.4 million and we generated 27.8 million in cash from operating activities in Q2 as compared to $27 million for the same period last year finally, I'd like to provide our financial guidance for Q3 and updated guidance for fiscal two.
Many.
For the third quarter fiscal 2000 total revenue is expected to be in the range of 168.5 million to 169.5 million or approximately 21% growth over third quarter fiscal 19 total revenue.
And adjusted EBITDA is expected to be in the range of 63.8 million to 64.8 million.
And for full fiscal year 20, total revenue is expected to be in the range of 572.5 million to 573.5 million or approximately 23% growth over fiscal 19 total revenue and adjusted EBITDA is expected to be in the range of 163.5 million to 165.5 million.
In conclusion, we are pleased with our Q2 results, including our consistent revenue growth, particularly in recurring and other revenue as well as our ability to continuously demonstrates scaling our business in both gross margin and Gionee and we continue to focus on making progress towards our long term financial targets. Operator, we're now ready for questions. Thank you.
Thank you to ask a question you need to press star one on your Touchtone telephone.
Sure lose yourself from the Q press the pound.
Again, if you would like to ask a question star one.
And our first question comes from Scott Berg with Needham Your line is open.
Hi, Steve Toby Congrats and good quarter, thanks for taking my questions.
I guess, Steve, let's let's just expand upon some of the sale success in hit you said in the quarter you said your.
Sales teams, we're off to the best start ever sounds like your move down markets, having some fruition.
See any changes in the environment and I guess in terms of demand trends.
You will customers are asking for maybe modules or is it just kind of strong productivity across your sales force.
Yes, so I think overall a lot of the enhancements that we've made to the product over the last several years, including new modules and feature ads. We definitely are seeing great reception in the market for those additions I mentioned community in the prepared remarks as a highlight for us in terms of both differentiation and utilization and I think the other thing I would say is the strengthened.
The salesforce in the first six months of the year really is across the board. So continued strength in units below the 50 employee Mark our core Midmarket offering has done really well and that the top end of our target market, we've done well and so when you put all that together, it's definitely the best start we've had in a number of years.
Great helpful and then.
Toby on the margin guidance for the year you raised revenue you kept your EBITDA adjusted EBITDA on an absolute basis flat Bill from your prior guidance. How should we think about that said that delta are you spending as a couple of areas or maybe being conservative around interest rate changes.
Yes, it's probably a little bit of both Scott I mean, I think we're definitely seeing it from a sales expense standpoint, which which is.
The results of the sales performance that 50 was just talking about which I think we're we're really happy with.
And then obviously we've had the headwind.
From the three rig cuts since July which has had an impact both from a revenue standpoint, but also from from an adjusted EBITDA perspective. So I think those are the two main.
Midpoints.
And I think overall I mean.
To be able to raise from revenue standpoint, and sort of keep the guide from adjusted EBITDA perspective, overall feels pretty good.
Okay Thats all at the moment I'll jump back into the queue. Thanks.
Thanks.
Thank you. Our next question comes from Terry Tillman with Suntrust. Your line is open.
Hey, how are you guys is actually Nick on for Terry. Thanks for taking my questions. So first one was around R&D. So I guess, how should we think that R&D investment going forward.
Should we expect further increases in pp why the near term are you focusing more iterating on the current products. Thanks.
Yes, so I think we have opportunities to both so we're definitely seeing increased penetration of a number of modules that we released over the last several years and that certainly helps us from a realized PDP why that we're getting across our clients at the same time, we've got an inside sales team really selling those products back to current clients. So we're getting a little bit of a lift there.
It's not a huge part of our new business revenue, but it gets bigger and bigger every single year.
And then lastly, we do think that we'll continue to be able to add modules overtime that we're going to be able to monetize.
And so the ability for us to continue to drive new product innovation, both from a feature set and new modules is definitely part of our long term plan and we believe that the range for R&D. When you expense and capitalize is really 10% to 15% we've been solidly in that range for a number of years and I think we would we would continue to look at that same type of investment on a.
Go forward basis.
Got it okay. That's helpful.
And then just a follow up so I guess any updates on and you touched on community in the prepared remarks, but.
On I guess attach rates or use across customer base for community or data insights.
You mentioned around 50% customers are using did insights at the user conference I guess, if any update you have there would be helpful. Thanks, Yes. So we definitely are seeing increase overall client utilization in our data insights module, which comes with any purchase so it's not a separate purchase.
And we have been driving new and different analytics for those customers to be able to benefit from that we've got a utilization dashboard that customers can use and see exactly what employees are doing in how that translates to both saving the clients time and driving higher levels of engagement is probably the newest analytics that we've added to the platform and then community.
Weve rolled that we completed the rollout in the fall.
We've been really happy with the uptake of that feature.
It really drives a lot of employee engagement unlock some pretty interesting use cases for our customers and I think I said in the past when we introduced a new module like that we really look to try to get 10 or 20% of our customers on that module within a reasonable period of time and I think we're on pace or even ahead of where I would've expected with community.
Got it okay. Thank you.
Thank you. Our next question comes from Pat Walravens with JMP Securities. Your line is open.
Oh, great. Thank you and congratulations you guys.
Okay.
I wanted to talk a little bit about.
How big this business can get and you have some slides and your deck that it really helps a lot of putting in a drill down just a little bit so yes 20000.
Customers roughly right, Steve and there's yep 600000 in your target market.
That's great ticket IL 600, right I mean, how so how many of those are really up for grabs the something where you can what sort of market share can you eventually end up with.
Sure. So I think a couple of things the 600000, our core market of 20 to 1000 employees.
As you said at the end of last fiscal year, we had a little more than 20000.
And you know I think our viewpoint is you know we're trying to continue to grow the business at above 20% per year.
Increasingly so thats coming from units as we saw last year, which was over 20% and so the idea.
Every between three and four years at that metric you can end up doubling the business and so if you think of that you know and 20000 clients being 60000 clients that still just 10% market share and so we look at that as you know within a reasonable timeframe and you look at kind of our long term model, that's something that we're kind of executing toward.
<unk> based off last year's metrics and we're going to stay focused on that in and we think theres room beyond that but thats a great near term target, let's think of doubling the business and getting to 1 billion and beyond has our next big milestone.
Alright. Thank you and then just sort of a follow up on that as you also have a great slide on the competitive landscape.
But one that sort of came across my radar recently and I don't see on here do you run into paid core.
Is that a competitor.
Yeah, I think we would characterize pay core as being one of the largest privately held companies that we see so a lot of the privately held companies are smaller companies operating in a very narrow geography.
And I think take where would definitely be much larger than that and so we would kind of put that still.
At this point in time that local regional and Thats, not saying anything about pay core there are tough competitor, we see them fairly often.
But not enough to necessarily call out specifically.
Okay perfect. Thank you very much congratulations.
Thank you. Our next question comes from Brad Reback with Stifel. Your line is open.
Great. Thanks, very much Steve if you think forward given the amount of engagement that you're seeing with the community product does that fundamentally changed the type of solutions you can put into your customer base going forward. Thanks.
Sure. So one of the ways that we think about it is we're really trying to add value in three different ways for our customers and one is we're really trying to save them time and really digitize the entire HR back office.
And so that does create a lot of interaction and a lot of transactions and it drives a lot of utilization on our platform. So we look at daily.
Users and weekly users and monthly users and we see that increasing based off the transactions. Secondly, we're trying to do is find more engaging use cases that are just automation of transaction. So you think about our survey product you think about performance management and journal capability reward and recognition with impressions and community, which creates a whole other less.
All of engagement and we take all of that data from both these engagement oriented products and transactional products and that we combine that to deliver interesting insights back to our clients and we do think that that data that we have about the employee and the frequency of which they engage certainly opens up interesting product opportunities on a go forward basis that likely surround.
That workforce, but that might be a little bit different than what we would have thought out thought of maybe three or four years ago.
Great. Thanks very much.
Thank you our next question comes from.
Mark Marcon with Baird. Your line is open.
Good afternoon utopian Ryan.
Wondering.
What are the implication.
From GE to scores, particularly in the market.
Represent a new opportunity.
Clearly doing really well from that perspective, so just wondering what the plans are to capitalize on that.
Yeah, I think we're really proud of those GQ scores overall and I think it reflects our focus on strong client experience that were ultimately delivering we've been consistently delivering over 92% revenue retention as a proofpoint and I think mobilizing our customers that advocate has been really really positive for us.
I'm not so sure that I would look at the first time, winning the enterprises unlocking some brand new potential I think it probably speaks to the success that we've actually having in that market I think it's important to mentioned that the strengthen the salesforce has really come across all segments and you know that 500, plus 500 to 1000, sometimes it goes a little beyond 2000.
Has been really strong start to us and I think it's just another proof point.
That's great and then.
With regards to be.
The guidance I Wonder how are you thinking about and flow balance growth for an effective yield and how that compares and contrasts relative to last year.
Yes, so I mean, obviously we've seen.
We have seen three rate cuts.
Since July and that's certainly a headwind as I said, both from a revenue and from an adjusted EBITDA perspective is that flows through and I think there is there will be continued flow through within the impacts in Q1 Q2, there will be continued flow through into Q3, and four and so I think.
So directionally.
You'll see that come through even though we have.
Average balances are up.
From around 1.11 0.3 in Q2.
You will continue to see that that impact flow through into Q3 in Q4.
Okay.
And then with regards to.
Deferred contract cost from the free cash flow.
How should we think about that on the.
As the year unfolds.
So I think what your what you see there is some of the the the proof point of the Salesforce execution that that Steve was talking about so.
We we have seen strength in Q1 in Q2, and if you look at.
Q1 in Q2 performance of this year versus prior years, I mean, thats one of the areas, where you start to see start to the impact of that.
I think it's early to references the strength of the sales performance in the first half so far in Q2.
Yeah, it's been great.
Terrific I'll follow up offline. Thank you yes.
Thank you. Our next question comes from some modest.
With Jefferies. Your line is open.
Hi.
Thanks for taking my questions.
So maybe first I just wanted to JV on sales and marketing expense side, just for clarity that's driven by more commissions because sales was stronger than expected any change on the customer acquisition cost side. If we just kind of how that like for like in similar sized deals.
No I mean I think.
I think what youre seeing in the sales and marketing costs. So if you take step back and we've talked about incremental investments in sales and marketing over the course of.
Okay last year, so and so I think you're just seeing some incremental investment there, but I think you're also seeing.
The other significant part of it is the incremental sales expense from the sales performance in the course of the year end in the quarter.
And I think just add to that if you compare that line item to last year at this time, we would say the the incremental.
Percentage to spend is largely driven by sales performance staffing levels in the sales organization directly related to our producers the marketing initiatives. We think are relatively small.
We're excited about some of the things that we're doing channels and marketing, but most of that is really coming from our sales organization performance.
Okay, Great and then maybe one for you Steve as you think about.
Competitive dynamics any changing in pricing behavior discounting behavior. Some of your larger competitors have not had such great quarters I'm just curious if you're seeing any change in behavior.
Prices and the number one factor, but it certainly is something that we get asked about.
Yes, yes, so I definitely don't think prices and everyone factor, but it but you're right. It's a competitive market and we're used to a highly competitive market.
And we really have not seen any changes to those dynamics at the end of the day, it's really the strength of our product and the service offering that we can provide those customers the kind of unlock the value that we're giving them is really probably more important than pricing, we haven't seen any abnormal behavior from a pricing perspective.
Great appreciate taking my questions. Thanks, guys.
Thanks.
Our next question comes from Brian Peterson with Raymond James Your line is open.
Thanks, Alex Sklar on for Brian Steve I, just wanted to follow up from the sales momentum comments can you just elaborate on what metrics that might be on is it simply just new customer growth are you also seeing momentum on larger initial deal size or upsells well.
Yes, So I think if you look at new business revenue is how the sales organization is compensated so new annual recurring revenue.
Is really where we're talking about seeing that strength and.
Last year, we saw a lot of strength in units under 50, and so I would say that has continued into this year.
And we've seen even better strength in our mid to upper end of our marketplace and so if I were to characterize last year versus this year last year, we had a good year from a sales perspective, it's been even better in that mid market and upper end with continued strength down market.
Got it thanks, Tobey I know has come up on prior calls, but I just wanted to ask about the higher percentage of cash being used for corporate investments this quarter.
That's out the commentary on the prior calls is more so tied to a higher percentage of client funds being invested so just wanted to ask about that.
Yes, so we do both we have a portion of funds held for clients that were investing and we also have a portion of corporate cash that were that we're investing as well.
Similar from a portfolio standpoint, but.
We are investing a piece of each and I think that just.
On the corporate cash piece.
Yes, just.
Sort of reflects nothing more or less than responsible placement of cash on the balance sheet. So.
Okay. Thank you.
Yep.
Thank you. Our next question comes from non Dan.
I'd with Guggenheim Partners. Your line is open.
Thank you good economics, thanks for taking my question.
Competitive question here.
The traditional service bureaus have also reported improving retention rates over the last couple of quarters.
Despite having some.
Some pricing actions as well.
I'm wondering how how much of a function decision for healthy.
Economic backdrop overall relative to any competitive sort of displacements and things like that.
Are you seeing from yours vantage point.
Yes, so I think the way we see the economy manifest in our client base is how many employees are being paid and how many active employees that they have and I would say, we haven't seen any change to with that run rate looks like so that has been kind of a slow growth environment for a while in that continues to look that way. So I don't think thats necessarily a factor for us.
Because it Hasnt change and secondly, we don't sell a whole bunch, a new businesses. So thats not a key part of what we do it sometimes you see with with the economy, increasing or new business formation. So I don't think the economy in itself has been really helpful or hurtful to us the biggest impacts really just been the interest rate declines and then of course, our own performance in terms of driving.
That.
Acceleration that you see in recurring revenue. These first two quarters of this fiscal year versus the last two quarters of last fiscal year.
Right and a quick follow up on the operational side I know you talked about adoption tools for customers to begin to adopt some of your from your features.
On the Onboarding side, how automated is that process on how much opportunity is there for you too.
Well, perhaps more efficient.
So on boarding been a great product for US we've had in the market now for for a number of years.
And we've got a significant portion of our customers that are complete and digitize the onboarding process using our platform. So.
You can imagine that prior to starting the first job you'll go online you fill it all the information fill at your required federal and state forms and you can include some content in there some welcoming content from the company and then be able to show up to work.
And not necessarily have to go through whatever a couple of two or three hours a paperwork like you normally would and so thats been a really great product for us. It's one of those products that we've even seen get adopted at the lower end of our market.
More than we would have.
Would've expected so we feel good about it.
All right. Thank you.
Our next question comes from Matt Paul.
William Blair Your line is open.
Hey, guys. Thanks for taking my questions I wanted to ask on the sub 50 and play market. How is the effort to build out or partner with additional.
This is in that area to help you generate customer leads progressing and then also as you put some more focused on the sub 50 market have you seen any competitive response from from companies that were that's more of their target market.
Sure. So I think on the first part.
If you look at our channel strategy, which is more than 25% of our new business revenue comes from brokers brokers do refer us fairly frequently under 50 employees. So it's not a new market for US is one that we're seeing opportunity and we're expanding into we are creating more relationships with cpis, who are off were often operating and I think we believed that does take a.
While to be able to get a client referrals show that you do a great job get another referral and build that relationship over time.
And we are gradually doing that and I think you see that in the unit success that we were able to drive last year at over 20%.
So we're really happy with the progress that we're making we think it's really more about expanding our channel approach than some sort of new brand new channel approach to be able to continue to success in that under 50 market.
Okay.
And then on the on the competitive side any any response from some of the company's over that's their their target market as you you've had more successor.
Yes, again, it's not a new market for us So I think thats an important point. We've always competed in that 20 to 50. So maybe we see more deals in the 10 to 20 than we ever had before as we kind of.
Accelerated the unit growth down market, but I think it's really mostly for us the usual competitors that we've always seen.
I, just see them a little bit more as we drive more activity there, but nothing new.
Great. That's all I had guys. Thanks a lot.
Thanks.
Thank you. Our next question comes from Citi Upone Grodsky your lot from Mizuho. Your line is open.
Thanks for taking my question just a follow up did not Vince question.
Do you guys mentioned about end Paychex, you get almost 50% appeared new clients and besides the improvement in the 10 Sunday talked about I think strengthen their 52 calls in that segment that talked about that essentially and also they talk about the new platform leafy on as well I'm wondering.
You are seeing any kind of changes not expecting any kind of changes and comprehensive landscape.
You know get more aggressive and come up with a new.
Dotcom.
Sure. So as I go back in the prepared remarks, you know this has really been the last few quarters had been the best Comport two sales quarters that we've had in a number of years.
And we continue to have success against what we think is all of our competitors and just by the fact that ATP in paychex or the larger ones in the space than we run into them more frequently and so.
We continue with that same level. The success, we haven't seen any differences from a competitive landscape, we really feel good about the win rates that were driving and the sales momentum that we have so I'm not sure that a small change in retention from some of those big players really affects the size of our opportunity go back to 10% market share 60000 clients.
We've got a lot of room before we can get there. So we feel really good about the start with that.
Then when you think of a growth.
You talked about some of them more deals getting traction. So how would you see the growth coming from increase in employee within your installed base versus cross selling new products into the installed base and versus new logos.
Sure. So first of all new logos is has always been the biggest driver of our growth and last year, you saw new logos accelerate to above 20% for kind of the first time in the number of years.
And we continue to have momentum in that under 50 marketplace. So thats, probably the right way to think about that.
I think in terms of add on sales, it's something that we are growing faster than maybe our salesforce, but it's still relatively small when you look at the total amount of new business revenue.
We do think that that's a great opportunity on a go forward basis, and the fact that our clients are asking for these products and adopting them is a great sign that we're going to be able to continue to do that and I think the last part of your question was clients, adding employees that they really small part of our growth rate. So.
Very very low single digit percentages in a slow growth economy, and thats been fairly consistent over the last number of years.
Okay and then last question you talked about Steve talked about R&D, a pretty ugly sisters. Some good back I'm wondering if you have any update on the argument and what are you going to rollout.
So we've had on demand paying the market.
We rolled it out to customers starting in the fall we made it available to all of our customers as of January 1st.
And we definitely have had a number of those customers adopt it.
I think what we've always said about on demand pay as it's a great option for an employee who might get stuck with unexpected expenses and need to be able to get paid that they've already earned.
You know available to them and.
But at the end of the day, we havent seen customers adopted in mass, we've seen customer sometimes be a little bit hesitant and kind of want to understand what are the controls that theyre going to have in place, which we have a number of and so I would say, it's kind of rolled out slowly to our customers. Although any of our 20000 plus customers could turn that on today.
And offer that to their employees.
Thank you.
Thank you. Our next question comes from Daniel Jester with Citi. Your line is open.
Yes. Thanks for taking my question I just wanted to go back to free cash flow question, a little while ago and sort of year to date in a free cash generation is maybe flattish to down compared to the same period last year, you talked about the deferred contract costs, but as you go throughout the rest of 2020.
Is there any other kind of puts and take to be thinking about in terms of how EBITDA gets converted to cash.
Yes, I think we've talked about from a from a measurement of free cash flow perspective is looking at that on an annual basis and.
We continue to drive free cash flow leverage maybe think back to where we where it's being.
Went from basically 12.9 to 16.3 over the last.
Last prior fiscal year and I think we've we've said we would would focus was on being able to drive continued free cash flow progress on an annual basis.
We're into the range that we've called out so I think we feel pretty good about that and.
I think we remain focused on being able to drive continued free cash flow leverage on an annual basis.
I think you see some timing elements sort of quarter to quarter within the year, but I.
I think if you look at it on annual basis, Thats still how we think about it.
That's helpful and then just on the on demand pay.
You just comment it maybe some of your customers are taking a look at it I mean, what specific can you give any specific examples of some of the reasons why they may not be as.
Fast to adopt or maybe some of the pushback that they've given to you more explicitly thank you.
Sure I think it comes down to some of the controls that they have in place in terms of their internal processes. So it's definitely something that you see more demand for hourly workers and do you think about it I need to make sure that that supervisor has approved the hours that have worked and I need to feel confident before I advanced them that pay that that pay was actually earn.
Earned a lot of the business processes that clients have our to do that on a weekly basis or on a biweekly basis, depending on their payroll frequency and that's where they have those double checks. They don't necessarily do that every single day and that's what they need to think about if I need to make sure that at that person is asking for an advance that yes. They were they.
Our that day prior my processes are verified so that a supervisor understand that and signs off of it and so I think theres. This.
Need for hourly workers and demand for hourly workers that does require a customer feeling comfortable that they have the right processes to make that available.
Great. Thank you.
Yes.
Thank you. Our next question comes from drew Goodman with Cantor Fitzgerald. Your line is open.
Hi, Thanks for taking my question just one for me and wanted to follow up also on on demand pay so I know that hesitancy from some customers, but just curious what the reaction has been from the people that are using it and idea on that 10% to 20% penetration how long that might take in any impact to revenue or any time.
For and that you think there could be.
Sure. So I think overall when we introduced a new modular product. We think about that is could be a two or three year timeframe before you get into that 10 or 20% kind of range.
Some products have definitely gone faster that a number of products have definitely gone faster than that I.
I think on demand pay you know is off to a good start I don't think that we would I think that this is going to have any immediate impact short run is relatively small fee structure associated with it you needle a whole bunch of volume for it to be material. It's a nice add on and great feature to have.
To differentiate us in the marketplace, but I wouldn't think that it's going to be material in the near term. We believe it's going to take awhile for customers to be able to drive that adoption and it's going to be a little bit more of a slower rollout.
From an employee perspective, those that have used it and by the way we offered to all of our employees as well we've got great feedback overall, and so you think about the holiday season, and depending on when your paycheck falls I need to be able to doing some giftgiving I need some extra cash you feel like scenario, where somebody runs into some sort of on.
Forecasted expense and they need new tires for their car or something like that we for different examples where they're really kind of advancing themselves and what it does it takes the employer out of the conversation to say Hey can you advance me my pay they can go on the App. They can see exactly what they've earned in real time and immediately request that it gets deposited in their bank account. So I think.
The employee experience that we've delivered has gotten great feedback I think it's just going to take a little bit of time for customers to.
Roll that out and from a revenue perspective, therefore, we'll have a fairly minimal impact as we look at the balance of this discrete fiscal year.
Perfect. Thank you.
Thank you our next question comes from.
Robert Simon with RBC capital markets. Your line is open.
Hi, Thanks for taking my question. So following up on these are all your questions I'm sorry for the flu a question on the topic, but.
Can you talk about undefined and how you're offering an approach our differentiated versus brothers provide.
Sure. So the way it works from an employee perspective as you log onto your mobile App, which we have significant mobile app utilization. So employees are used to going on there to do a whole bunch of things.
They can look at their pay they can actually look at how much of that their pay for the next payroll period has been earned so you can see it in real time also fired earned $475 you can actually see it from gross to net with all the taxes and all these deductions taking out you can request whatever amount is available for you to request and there's some settings that customer can put into.
To manage that.
And then the direct it will be direct deposit into your account either same day, depending on the time of day or next day and that is easy. It is as it is to use.
And then what is the revenue model actually for you.
Is that based on cancer fees or what else. Yes. So the client has the client selects whether they want to offer that is a benefit to their employees and pay a small kind of transactional fee or they want to have that employ pay that small transactional fees up to the customer.
Got it great. Thanks.
Thank you. Our next question comes from Arvind Ramnani with Keybanc. Your line is open.
Hey.
Thanks for taking my question.
So my first question is based on my and my checks with your core market.
Certainly feedback on that product among users as prospective clients is is very positive.
Great seem seemed to be also very good.
But but can you talk a little bit about kind of when rates with larger clients and in particular, if we're now shift yara landscapes gets acquired by a large employer.
How do you want to high win rate in those those types of situation.
Sure. So I think one other things of that I have said a couple of times as we've definitely seen strength across the entire market. So we would think about that as you know below 50.
Due to 500, and then 500 plus and so that 500 to 1000 is really the space at the upper end and again, sometimes those customers or even a little bit larger there I would tell you that we feel really good about our retention rates in that space. So the strength of our product as clients needs change overtime.
And then secondly, that's been a big piece of the sale story for the first part of the year. So we've had strength in both our core market as well as that 500 plus.
And so we definitely feel really good about the win rate and they're part of that contribution to.
Strong start to the year.
Great and then.
As it is going to tone.
On this call as well as kind of underlying growth rates all seem to be very positive.
Are there any areas of offset of concern or.
I mean, I understand you ask them higher cost about that suddenly offset by higher sales performance in all of that but I'd like.
Any real area of the softness or weakness.
Focused on.
No I mean, I think the challenge for US. This year is you've got three interest rate cuts as wind in our face.
The last couple of years, we kind of headwind behind our backs and so I think that puts more pressure on adjusted EBITDA than any other line item and then you overlay great start to the year in strong sales performance.
So you see us we feel pretty good that we're able to be in our EBITDA range that we're able to maintain that guidance for the year absorb those rate cuts for the year.
And then be able to also handle the expense associated with the strong sales start and so thats really what we're trying to manage through the back half of the year, but I would always say those are the kind of problems I'd like to have.
Great and just last question for me I mean, I feel I should ask a question on this on different compensation.
We have talked about it.
Okay and on.
Quite a bit but one.
Our topic I want to get clarification as is the IR IRS rules around on demand is that clear because then I know into few months back there was lack of clarity on on data tax implications.
Sure I think anytime there is changing the way people are working whether it's the impact of the gave economy in the number of 10 99 workers and legislation that you've seen california around that or on demand paying the idea of getting an advance on my pay.
Theres going to be catch up from a legislation perspective, we haven't seen a lot of clarity as of yet what we're really doing is offering people pay that they've earned and we're providing them in advance ahead of their regularly scheduled payday.
Before before they get there and so we definitely believe our product gives them a compliant offering.
Based off the current structure, but we monitor that closely and we feel that if there are changes to it we can easily adapt.
Great. Thank you very much and.
Good luck for the rest of the here.
Thanks, Thank you.
Thank you. Our next question comes from Jeff.
Foundry with Craig Hallum. Your line is open.
Thanks, guys. One brief on here I just want to touch maybe just touch back on Eagle share and compete relationships, how those as commodity gate relative to expectations in any implications for.
I wanted to be more or less aggressive with other similar relationships down the road.
Yeah, we talk about it on last call that we really traditionally focused on brokers and financial advisors and generating that 25% plus of our revenue from that channel and Ebo share partnership, which we've been really happy with the start is really targeted at the financial advisors and really help provide the financial advisors differentiation and really integrates our product offerings.
The compete is definitely something a little bit newer for us and that's really kind of a software partnership where you might have either vertical market software or kind of horizontal software offerings that we would then create a much more integrated offering.
For our mutual customers and then be able to jointly market that and so we've been really happy with that one as well now none of those are really that material I think it's more about the concept and the idea that we could create more of these overtime and that that would be a component of how we drive channels to continue to be that 25% plus of our revenue.
Very helpful. Thanks.
Thank you.
Thank you and I'm showing no further questions in the queue I'd like to turn the call back to Steve Kim for closing remarks.
Great well I just wanted to take a brief moment to once again, thank all of our employees during the busiest time of year and then of course, thank everybody on the call for your interest in Paylocity have a great night.
Ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect everyone have a great day.
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