Q3 2020 Earnings Call
<unk> in Tobi Williams C.F.O.s Paylocity.
Today, we will be discussing the results announced in our press release issued after the market closed a web cast replay of this call will be available for the next 45 days on our website.
Under the Investor Relations tab.
Before beginning we much costing you the today's remarks, including statements made during the question and answer session contain forward looking statements.
Statements are subject to numerous important factors risks and uncertainty, which could cause actual results to differ from the results imply babies or other forward looking statements.
Also these statements are based solely on the present information intercept.
Jack to risks and uncertainties that can cause actual results a different 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 gap financial measures.
We believe that non gap 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 P.L.S.D. Dot com under the Investor Relations tab and filed with the Securities and Exchange Commission.
Please note that we are unable to reconcile any forward looking non gap financial measures to their directly comparable get financial measures because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.
In regards for upcoming conference schedule, we will virtually attend the need 'em Tech immediate conference on May 19th Baird Global Consumer Technology and services conference on June 2nd and William Blair's growth Dot conference on June 10th.
Please let me know if you'd like to schedule time with us at any of these events with that let me turn the color to Steve.
Thank you right if they have to all of your for joining US our third quarter fiscal 20 earnings call before discussing our result, I Wanna first comment on the evolving situation around cobin 19.
Number one priority has been ensuring the safety and health of our employees, but also providing world class service, two or more than 20000 clients and police report that we successfully transition nearly all of our employees to work from home in mid March and all of our business functions remains fully operational but notice rush into 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 and the F.F.C.R.A. legislation add functionality to our systems to address these legislative changes in an automated fasching and proactively communicate to clients and prospects the impact of.
These changes.
We have seen an increase in interactions with our clients over the past 45 days, they look for support and assistance through the crisis.
I've been very pleased with our ability to maintain or service levels.
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Environment, including helping them navigate the significant legislative changes.
We believe we were first to market with both comprehensive communications around the new legislation and the incorporation of these regulatory changes in our systems, including Paycheck protection reporting higher levels of automation around paid sickly and extended family leave and employee retention credit functionality. In addition, our team leveraged are learning management.
System to quickly developed in large training set.
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For 10000 attendees.
Specific to hurt you three result, coven 19 had a minimal impact on our financial results, which were highlighted by accelerating recurring and other revenue growth 25.3%.
Despite interest rate headwinds in a quarter strong performance of our sales team a lot as to exceed the midpoint of our revenue guidance by 2.6 million well also delivering recurring another revenue growth north of 25% through that first nine months of fiscal 20.
Consistent with the commentary we provided on our February earnings call ourselves can continue to perform at a high level with sales through March up nearly 40% over the same period last year.
You're Additionally April bookings, where nearly double April 2000 in 19, and our sales team continues to win deal even now.
We are coming through state shutdowns that said in April we started to see a higher than normal rate of implementations pushing out if you.
You're months at a subset of clients implementation focused on more immediate personal and professional challenges given the current environment in terms of where we are winning 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.
Channel referrals once again represents more than 25% of new business for the third quarter, well, we don't know how long the coat with 19 environment will last we do believe that in a post covert 19 environment, we will be well positioned to regain the sales momentum we've seen in the first nine months of fiscal 20.
Adjusted even though the third quarter with 68.2 million, where 39.8% margin and 3.9 million ahead of guidance as we continue to drive leverage in an adjusted gross margin in G.N.A., well investing in R. and D.S.L. in marketing to drive growth.
Are sustained investment in product development continues to pay dividends in the marketplace, but our products, we being a key differentiator versus our competition.
Additionally in March we launched a new website any company rebrand under the tag line forward together or Rerenting efforts placed an increase emphasis on fostering a culture deeply invested in our clients success and the technology they need to achieve it.
Focus on product development, coupled with providing technology that helps our clients achieve their goals continues to be confirmed by third party research paylocity earn multiple spot on G. Twos Best software companies 2020 report, including a top 10 ranking in the best products for H.R. top 50 products for mid market, hi satisfaction products and.
Software product categories.
We also continue to be pleased with the client adoption and use a boat our community and L.M.S. products, which we believe are even more valuable to clients in their employees in the current environment, where communication is more important than ever and more challenging than ever.
Deep in our strength in video communication capabilities in early April you know the acquisition of degrade a leading video platform provider that enables peer to peer video learning courses philosophy has partnered with big grid for several years to deliver a video enabled learning management system to our clients and over this time, you've seen success with our L.M.S.
Solution due to the growing demand for video communication from our fives.
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[laughter] believe video will play a critical role in transforming workplace communication and we see it opportunity to leverage they'd grids video capabilities more.
Rodney throughout our H.T.M. products we.
We also continue to receive strong feedback on community with client usage up significantly during the month of March and April as clients continue to develop use cases for increased communication and messaging in the current environment internally, we relied heavily on community during the Cobin 19 pandemic as we've provided real time update to our employee.
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[laughter], including video messages from our leaders. This has been an exceptionally busy time anti challenging time on many levels for our clients and our employees I Wanna. Thank all of our employees for their hard work and dedication in helping our clients through this crisis I would also like the banks are clients.
Perseverance through this difficult time, we are here to help.
I would now like to pass the call to Toby to review the quarters result in detail.
Oh and provide guidance.
Think the.
Total revenue for Q3 was 171.6 million and increase of 22.9% with a recurring another revenues.
Up 25.3% from the same period last year as Steve noted are still team had another strong quarter and we're pleased with the consistency of our performance specifically the growth, we're seeing and recurring another revenues through the first nine months of this year offsetting some of the headwind of five interest rate cuts since July.
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Are adjusted gross profit with 75.7% for Q. tree up 20 basis points from Q. treat fiscal 19.
We continue to make significant investments in research and development and to understand our overall investment in R. and D. is important to combine both what we expense and what we kept.
Idolize on a combined non get basis total r. and D. investments were 12.1% of revenue in Q3 and on a dollar basis are your every year investment in total r. and D. increased by 24.6%.
On a non gap basis sales and marketing.
Expenses were 20% of revenue and Q3.
On a non gap basis, G.N.A. costs were 10.7% of revenue in Q3 versus 12.5% and Q3 of last fiscal year. It 180 basis point improvement and we remain focused on consistently leveraging our G.N.A. expenses on an annual basis.
Adjusted EBITDA for the third quarter with 68.2 million.
Or 39.8% margin 50 basis points over Q3 fiscal 19 in 3.9 million ahead of guides.
Covering our gap results for the quarter gross profit was 123.6 million operating income was 47.7 million and net income was 40.1 million.
Our cash flow generation remained strong year to date and we generated 86.
It's point 7 million in cash from operating activities through the first nine months of fiscal 20.
In regards to balance sheet, we end of the.
[laughter] retention an employee towns.
While we cannot predict the death and duration of the cobin 19 related economic environment or the flow through impact to our business. We have seen headwinds in q. for from Cobin 19 that will impact our business for a period of time.
Sales, while our sales team experience great momentum in the first nine months of fiscal 20 and their activity remained strong and they continue to engage with prospects via video and phone the pace of our new client start activity is lower so far in q. for than the year today.
Eight Q3 trajectory.
True Q. tree revenue retention remain strong inconsistent with historic levels at 92% plus and while we have not yet seen a significant increasing client losses through April 3rd is clearly a heightened risk of clients going out of business in the current environment.
We have seen a significant number of class.
[laughter] utilizing our system reporting built for the Paycheck protection program loan application process that we don't have visibility into how many actually received the P.P.P. logs.
In April we also began to see a reduction in active employees per client.
Seeing positive employee per client counts across our bayes through March.
Going forward, we anticipate the changes inclined employees on our platform and the related revenue headwinds, we'll trend directional the with the unemployment rate.
In regards to client held funds and interest income.
Our average daily balance of client funds in Q3 was 1.6 billion.
We're estimating the average daily balance will be approximately 1.3 billion in Q4, and we assume an average yield in the quarter of 10 to 15 basis points.
We expect 150 basis points interest rate reductions that occurred in March two impact you for interest income on client held funds by approximately 4.5 million compared to queue for fiscal 19.
Finally, I liked provider guides for Q4 in fiscal 20, which incorporates known and some estimated impacts related to cope with 19.
So the fourth quarter of fiscal 20 total revenue is expected to be in the range of a 121 million to 131 million or approximately 5% growth at the midpoint over fourth quarter fiscal 19 total revenue.
Adjusted you've it that is expected to be in the range of 14 to 20.
Okay I have to star in the number one key on your telephone. It's a question I was around 30 restaurant yourself here. Please press the pound cool.
Again, let us to our than one question, one moment already compiled kimball wrong. So.
Our first question comes from true Cook, well Cantor Fitzgerald your line it okay.
Hi, Thanks for taking my questions I was hoping you could.
Talk about maybe the playbook from Oh, eight or nine and what's different now what you can usually 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 and.
Even what we saw in a way to know nine and so I think one of the big challenges our ability to be able to make sure that we can be there for our clients jarrod heightened level of activity a lot of legislation changes that very different than 089 or just in terms of that level of activity. It's almost like a second year end for our servers teams in terms of the interactions with our clients.
I think second part of this is just the sadness of what we're experiencing yeah do you look at the employment levels across the country has a hall you understand that we've got a lot of employees out on our our platform and quiet that are also affected that way. So directly you see that incorporated into our guidance that we're certainly forecasting lower employment levels as as you see in the unemployment numbers.
Yeah.
I got it thanks, and then maybe you could touch on I know you guys tend to be in the smaller employees space and maybe just how many would be at risk for potentially going out of business or at least taking a wild before they recover.
Sure so our our target market has largely been.
And you know for most part history kind of 22, a thousand employees were advertised customers 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 at all come to us and say I'm shutting down they may temporarily spend operations and we'll have to wait to see as those states open up if they're able to continue to.
Reopened but at this point in time, we've not seen any impact to our losses.
Thank you.
Thank you and then next question comes from Cindy <unk>.
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Hey, Thanks for taking my question. This is actually might go on for city on the same note for retention do you guys count for low I was charging for for a little boys or how do you guys charge or.
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Yeah. So it does very depends on the product bundles that we've got and the.
You know that we do change pricing overtime and reacting to the marketplace. We bundle in package you have to make it efficient easy for our clients to buy I think the way to think about revenue tied to number of employees. It's very much in the same direction is employment. So as you see him unemployment riding then the number of important.
Things that are going to be on our platform will decline and then we'll get the revenue impact 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 ever clarification, if there for about.
I haven't been tell you that period it depends on the product if you recognize revenue for that pay period.
Yeah, it depends what even for a load means right in terms of have unemployed how quiet.
And it'd be able to do that I would say that if you kind of look at if you. If you look at what the unemployment rate is and you don't understand that okay that increases the number of employees on our platform are gonna decline and then you kind of ignore the.
The leaves status, whether there for a load or leave an active I I would try to look past that complexity because the reality is.
The number of employees at our platform has declined we incorporated that into our guidance and then as employment and state start to open up we should get the benefit of them coming back to work.
Okay greater than quick follow up as the.
Quantitative we could you describe our you above or.
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We we think about three times and level.
Today orders that were today, yeah. So we typically will say give you annual retention is 92% plus and we we do that at the end of the year.