Q4 2020 Paylocity Holding Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to pay lots to be holding corporation's fourth quarter 2020 fiscal year earnings results Conference call.

At this time, all participants are in listen only mode.

After the speaker presentation, there will be a question and answer session.

To ask a question during the session you will need to press star one on your telephone.

If you require any further assistance please press star zero.

It is now my pleasure to introduce vice President of S.P. in a in Investor Relations right and Glenn.

Good afternoon, and welcome to pay lots of these earnings results call for the fourth quarter in fiscal year 2020, which ended on June Thirtyth 2020, I'm wrangling, Vice President of Afghanaid Investor Relations and joint.

For me on the call today see Beauchamp, CEO pay Laci and Toby Williams CFO philosophy.

Today, we will be discussing the results announced in our press release issued after the market place.

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 could 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 could differ materially from those projected in a forward looking statements.

For additional information please refer to our filings with the Securities Exchange Commission for their 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 that pay lastly, dotcom under the Investor Relations tab.

And filed with the Securities Exchange Commission.

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 regard to our upcoming conference schedule, we will virtually attend the Raymond James <unk> mid cap growth conference on August 18th and the City Global Technology Conference on September eight. Please let me know if you'd like to scheduled time with us at either 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 fourth quarter in fiscal 2000, <unk> earnings call before discussing our results I want to first provide an update on the evolving situation around cobot 19, and its impact to our business. Our number one priority has remained ensuring the safety and health of our employees, while also providing world class service to our more than 24000.

And clients all of our business functions have remained fully operational throughout the pandemic with no disruption to client I continue to be impressed by the dedication of our more than 3600 employees as they have transitioned to nearly 100% remote working environment well, helping our clients through these challenging times.

In terms of our financial results given the Kobin related headwinds we were pleased with our Q4 results, which saw recurring revenue and other revenue of 129.3 million or 12.7% growth with total revenue of 130.6 million at the top end of our guidance for the quarter.

For fiscal 20 recurring and other revenue was 546.2 million or 22% growth with total revenue of 561.3 million or 20% growth.

Adjusted EBITDA for the fourth quarter was 30.8 million or 23.6% margin for fiscal 20, adjusted EBITDA was 159.8 million or 28.5% margin.

Our growth Formula continues to be driven by adding new clients to our platform and selling more products to each client we on boarded a record number of new clients and physical 20, finishing the fiscal year with 24450 clients compared to 20200 at the end of last fiscal year, an increase of 21%.

In terms of where we're winning we continue to see strength across our entire target market unit strength continues with a record number of new clients driven by our success with client under 50 employees. This segment of the market continues to demand more than payroll, taking a broader array of HCM products, such as learning management Onboarding Rick.

Routing and performance management the sales performance in a core part of our market 50 to 1000 employees was the biggest driver to successful fiscal 20.

New sales were up over 40% for the first nine months of the year and despite the macro headwinds of Cobot 19, we still started more new annual recurring revenue in the fourth quarter fiscal 20 than we did in the fourth quarter of fiscal 19.

Overall, we are pleased by the attach rate we are realizing throughout our target market as clients continue to see the value in our comprehensive product suite with modern features that address the ever changing workplace landscape.

Our commitment to product development continues to be recognized in the marketplace with Paylocity ranking high on multiple gtwo crowd grid reports during fiscal 2000, including a top 10 ranking in the best products for HR top 50 products from mid market high satisfaction products and best software product categories.

We increased our investment in research and development in fiscal 20 by over 24%. When you consider what we expense and capitalize continued investment in research and development positioned us to extend our industry, leading platform by adding functionality to our existing product suite and introducing new products. We also continue to receive strong feedback on learned.

The management and community with client usage up significantly during Q4 training classes created assigned and completed were all up significantly in the quarter and we also saw a notable increase in mobile usage within our learning management platform.

Last week, we announced the release of ask an expert and new feature within community that provides a forum between employees and subject matter experts African expert users will have direct access to groups, where they can get answers on topics such as payroll benefits and I T. Troubleshooting just to name a few.

This new feature provides organizations with an avenue to share meaningful timely and relevant content with employees, which is especially important in this new environment.

In addition to ask an expert in an effort to help prospects and clients rethink how they recruit rehire engage their workforce in this new environment. We recently released a number of other new product features and resources to help clients maintaining safe work environment, We released mobile attestation, which allows employers to configure punching props to idle.

Five potential cobot symptoms in their employees.

Further our newly released timing labor scheduling reinforcement allows administrators demand is shift capacity to abide by CDC social distancing guidelines.

To support remote engagement for managers, we also launched two new courses within learning management, including keeping virtual employees engaged and collaborating in virtual meetings.

In addition, new courses around mindfulness in managing Strs are also now available in our product to help quite to recruit and rehire within our recruiting and Onboarding modules organizations can now launch of virtual rehire events by automatically changing the status of a furloughed employees and inviting past employees to submit applications for rehire quite can easily invite.

And it is to apply for specific jobs eating in expanding talent pools to expedite the on boarding process for rehires paid losses, we rolled out geo location enhancements to immediately validate state and local taxes based on employees home and work address.

This year, we also deepened our strength in video communication capabilities via the acquisition of bid grid in early April a leading video platform provider that enables peer to peer video learning courses. We believe video will play a critical role in transforming workplace communication and we see an opportunity to leverage you bid grids video capabilities more.

Widely throughout our HCM products suite.

We have also continued to invest in our salesforce by adding new sales reps well at the same time investing in training initiatives and marketing and channel programs to drive productivity.

We've expanded the sales force by 14% this fiscal year from 382 sales reps in fiscal 20 to 437 sales reps in fiscal 2001.

In addition in fiscal 19, we started building a sales team focused on emerging clients, who are at the lower end of our target market.

Smaller clients are increasingly demanding modern HCM component as part of their solution and we believe we are uniquely position to deliver a single SAS based product across the entire SMB market.

Well these efforts continue to ramp up and remain a small portion of our overall sales team. We are entering fiscal 21 with approximately 60 reps focused on inside and outside emerging market sales and again. This group of reps has grown to 60 over the past two fiscal years. The 60 reps for fiscal 2001 is an increase of.

Approximately 15% from the prior year inline with our overall sales head count growth.

This gives us a total of 497 reps coming into fiscal 21.

In addition to investing in the growth of our Salesforce. We also continue to invest in our channel initiatives and we remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in fiscal 2000.

Finally, I'd like to thank our more than 3600 highly dedicated employees across the country for all the efforts. This past fiscal year. These past few months have been an exceptionally challenging time and I want to recognize all of our employees for their hard work and dedication and helping our clients through this crisis I would now like to pass the call. It the Toby to review the quarter's results in detail.

Ill and provide financial guidance.

Thanks, Steve total revenue for the fourth quarter was 130.6 million, an increase of 8.5% with recurring and other revenues up 12.7% from the same period last year as Steve noted our sales team had a solid quarter in the face of a challenging environment and we were pleased to come in 4.6 million above the mid.

Point of our revenue guidance, despite the anticipated cobot 19 related and interest rate related headwinds.

For the year recurring and other revenues were up 22% and total revenue was up 20%.

For the fourth quarter, our adjusted gross profit was 70.1% and for the year It was 72.1%.

We continue to make significant investments in research and development and 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 16.3% of revenue in the fourth quarter compared to 14.6% in a year ago quarter.

Full year total research and development investments were 14.3% of revenue compared to 13.8% in fiscal 19.

On a dollar basis, our year over year investment in total R&D increased by 24.4% in fiscal 2000, <unk> when compared to fiscal 19.

We continue to believe our investment in R&D provide us with valuable product differentiation and the ability to drive future growth.

On a non-GAAP basis sales and marketing expenses were 22.9% of revenue in the fourth quarter and 23.3% for fiscal 2000.

Non-GAAP basis, DNA costs were 15.5% of revenue in the fourth quarter versus 15.3% in the same period last year.

Full year Genie costs were 13.8% of revenue as compared to 14.8% in fiscal 19, and we're pleased to have remained in our long term range of 10% to 15%.

We remain focused on consistently leveraging our DNA expenses on an annual basis.

Adjusted EBITDA for the fourth quarter was 30.8 million or 23.6% margin and 12.8 million ahead of guidance.

Our adjusted EBITDA for the year was 159.8 million or 28.5% of total revenue.

We remain committed to progressing towards our adjusted EBITDA target of 30% to 35% of revenue once we returned to normalized macroeconomic environment.

Briefly covering our GAAP results for the quarter gross profit was 84.7 million operating income was 6.3 million net income was 5 million.

For the full year gross profit was 379.3 million operating income was 66.2 million and net income was 64.5 million.

In regard to the balance sheet, we ended the year with cash cash equivalents and invested corporate cash of 288 million.

Compared to 162.5 million as of the end of last year, an increase of 125.5 million were 77.2%.

As a reminder, we also do down 100 million from our revolving credit facility in early April purely out of an abundance of caution given the uncertainty we've all experienced.

Free cash flow, which we defined as cash from operating activities less capitalized internal use software costs purchase of property and equipment and lease allowances for tenant improvements.

70.4 million were 12.5% of revenue in fiscal 2000 versus 76.1 million or 16.3% of revenue in fiscal 19.

Before reviewing guidance I would like to provide some additional color on the current operating environment.

While we cannot predict the depth and duration of the cobot 19 related economic environment. We did see headwinds in Q4 from Cowen 19 that we believe will impact our business for a period of time.

In April we began to see reduction in plays on our platform, which is marginally improved as the quarter progressed also well. We believe there continues to be a heightened risk for clients going out of business. We're pleased to report that our revenue retention remained above 92% throughout fiscal 2000.

On sales our team experienced great momentum in the first nine months at fiscal 20 and their activity remains strong as they continue to engage with prospects via video in phone in a virtual selling environment.

As Steve noted, we started more new annual recurring revenue in the fourth quarter fiscal 20 than we did in the fourth quarter fiscal 19.

In regard to client held funds and interest income our average daily balance of client funds was 1.2 billion in Q4, and 1.4 billion for fiscal 2000.

We are estimating and <unk> the average daily balance will be approximately 1.2 billion in Q1, and we assume an average yield of approximately 10 basis points in the first quarter.

Finally, I'd like to provide our guidance for Q1 fiscal 21, which incorporates known and some estimated impacts related to cobot 19.

For the first quarter fiscal 21 total revenue is expected to be in the range of 131.5 million to 135.5 million or 5.4% growth at the midpoint over first quarter fiscal 2000 total revenue.

And adjusted EBITDA is expected to be in the range of 18.5 million to 21.5 million.

Operator, we're now ready for questions. Thank you.

Thank you.

As a reminder to ask a question you will need to press star one on your telephone. So withdraw your question press the pound Pcie. Please standby, while we coupled with DNA roster.

I don't know first question comes from the line of Scott Berg with Needham Needham <unk> company.

Hi, Steve Tobin, Ryan Congrats on good quarter and thanks for taking my questions.

I guess couple from me.

Steve let's start with sales in the quarter.

Just kind of versus expectations.

Curious to know how they trended relative to maybe the same conversation 90 days ago in what your thoughts going into the quarter were and then secondly, the comments on you started more a are in the quarter versus the fourth quarter 2019, because that's a function of sales actually occurring that occurred in the quarter or sales that maybe.

Partially a function of that started in the third quarter. Thanks.

Sure Scott So I think as we entered the pandemic we had significant momentum in sales I think as mentioned in the prepared script, we're up 40% year over year going into the pandemic.

And so we were pretty happy to be able to kind of start more than we had last year. There's two facets to that one is how much you sell in the quarter and then obviously what you might already have submitted on on the docket, but remember we did have a bunch of delays and submit some we called that out last quarter and so when you combine the fact that there were some delays, but the salesforce was still submitting new business. The fact that we were able to.

Actually start more business than last year was really kind of a combination of both and then I think the other thing I would tell you is momentum kind of built.

Throughout the quarter and so as we look at July we had a great selling a month in July and so we're very much approaching those pre cobot sales levels.

As we move past the fiscal year and into July.

Excellent and then from a follow up question.

My Minnesota Math tells me Europe the revenue level. The company is about six times. The size is what it was in 2014 when you went public yet.

Partner still generate about 25% of your net new business, which I think it's super impressive six years later, but how long do you think that sustainable kind of in those levels I know you've been talking about the last couple of years even after.

The EPA bump that 25 is kind of the right level to think about but as we go for the next two or three years two weeks, we still being that 25, maybe 20% range.

Yes, so I'm I'm really pleased to be able to have more than 25% of our new business revenue come from partners. There are thousands and thousands of potential partners. When you really think the relationships. We have are between our individual sales reps and those individual brokers. So it's not just the firms, but it's the individual brokers that provide those leads to our sales reps and so we see an opportunity to be able to get.

Deeper relationships with our existing.

Partners as well as the opportunity be able to add new partners and we've made investment over the last couple of years, both in product as well as some channel marketing opportunities that we think.

It remains really really core part of our go to market on a go forward basis, and so you know I'm not sure. If you fast forward. Another six years, whether it can still be 25% or more of our business, but we feel pretty confident in the near future that it will be as important as it has been in the past.

Excellent Congrats again, thanks for taking my questions.

Thank you and our next question comes from the line a mark Mark on with Baird.

[noise] are good afternoon, thanks for taking my questions and congrats on the on the strong performance in the quarter wondering just with regards to bookings specifically within this quarter, how does that compare relative to a year ago. I know, we were trending really strongly prior to the quarter, but how did that come in.

Well, we're definitely try to drive our business base off starts.

Very much how we've kind of run the equation and so you know when you think about starts you've got bookings at that happened a little bit at the end of last quarter, but the reality is a lot of our our sales happen in that same quarter and so we weren't on the same toward pace, we were on that 40% prior to the pandemic, but we saw a little bit of a low as we entered April.

Then we saw things build back up from a sales perspective throughout the end of the quarter to the point, where we look at July and that's one of the best months, we've ever had and so I think thats the way to kind of think about it is certainly a little bit of headwind early in the quarter building throughout the rest of the quarter to a point, where we feel really good about where we sit today after looking at July.

Great and then can you talk a little bit about the impact on revenue in terms of the reduction in terms of the employees per client how much how much of a reduction did you see in terms would be the number of employees per client and is there anyway to quantify what the what the revenue headwind was during the quarter because of that relative to the prior quarter.

Yes. So if you look at pre pandemic recurring revenue and other was near 25% growth over the last several quarters before we entered the pandemic and so if you were too.

Take into account the workforce reduction that we saw in the platform. If we didn't have that reduction in the workforce. We would have been at a very similar rate. So I think that gives you the opportunity to kind of fill in the math in terms with the impact of the pandemic was in the quarter.

And then can you talk a little bit about bridging.

What goes into the assumption with regards to revenue and and an EBITDA here for the for the upcoming first quarter or what areas are you going to spend more are there going to gross margin contractions or how should we think about that yes. So first on revenue I think the way to think about it as we saw as Toby.

Mentioned employees decline rather quickly in April and then it started to build back up but very very slowly and so right now what we're seeing in July is fairly flat employment levels and that kind of the assumption that we put into our revenue model. We assume that we would continue to gain momentum in sales as I'd mentioned with July being very strong. So that's another.

The key part of the assumption in the model and then from an expense perspective, as we entered the pandemic out of an abundance of caution we did halt a bunch of our hiring and some of our programs and we did get a fair amount of kind of onetime benefit associated with that but as we saw our momentum building throughout the quarter, we started getting back into investment mode and hiring mode and so.

That is certainly thought through in terms of.

Our EBITDA number for the first first quarter. Our view is we need to continue invest for the long term, we've got a huge opportunity in front of us and this pandemic is going to last awhile, but it isn't going to last forever and we want to come out of the other side of it with momentum if I could squeeze one more in 30% to 35%.

Adjusted EBITDA margins when we get back to normal does that include interest rates being back to normal and what would got what in your mind is that.

Yes, so I mean, obviously this was a tough kind of interest rate environment. We had absorbed several interest rate declined and if you go through the first three quarters of the year, we're well on pace to meet or exceed our 28% adjusted EBITDA from the year prior and so.

I don't think we need big tailwind in interest rates to hit the bottom end at that 30% to 35% range, we could still hit that in a low interest rate environment might take us a little bit longer than would have had prior but we definitely think thats achievable.

Thank you.

Thank you.

Our next question comes from the line of Cherry Hill, which rose.

Hey, folks this is david longer filling in for Terry Tillman tight thanks for taking time.

I guess broadly speaking guys like over the last five months, what's been the biggest differentiator for you when it comes to winning replacement deals.

And based on your observations, which product areas in your sweeter, most critical to both cross prospective and existing customers right. Now. Thank you sure. So I think if you take a step back and you think about our product strategy is really revolves around being the most modern platform available to our customers and a lot of the features that we have designed in we've added to the platform.

Really appeal to a modern worker and as everyone has had a transition to work from home more flexible working range man, two or really changing the way they are running their business. It becomes a very opportune time to be able to look at how are you training employees. How are you onboarding employed how are you doing your performance management process and so I think that is really resonated and.

Allowed us to continue with the sales momentum that we had pre pre coded. We've also added in as I said in the prepared remarks, a lot to our product in terms of features specific to co bid. But also features that we think are going to be really important on a go forward basis. So the idea of communicating via video has become very common place within within our customer set and so we're excited about.

In addition, and the ability to be able to integrate that into our portfolio. So we saw a huge increases in LMS. We saw increases in surveys we saw increases in community products as always for employers to connect with employees as they are working in virtual environments or in different ways than they ever have before and we think those will be helpful. On a go forward.

Basis.

Thanks for that and I think just to kind of expand on though the prior question.

Right so to expenses from the previous on us.

We think about the balancing act in managing expenses versus growth.

Which area.

It's actually for the most leverage in order to kind of pull that lever and focus on growth in the near term.

The one deals.

Yeah.

No I think.

A lot of our expenses fall into it people oriented expenses right, whether it's there then building products selling customers are servicing our customers and so you know we've always had an approach towards investing in R&D for the long term and investing in sales and marketing for the long term and where we've historically gotten more leverage is that of gross margin a lot of our HCM products naturally carry a higher margin.

And then over DNA and so I think as we.

Entered this kind of next phase of the pandemic, we want to go back to our roots of investing in sales and marketing for growth and investing in R&D. While at the same time finding ways to be able to create leverage NGL day in gross margin now some of that leverage might take a little while to come back because it requires people to come back to work and get those workforce reduction numbers to positive territory, but.

That's really the approach we're going to take on a go forward basis.

Got it thanks, guys and then just one last one quick one you mentioned the retention rate is 90%.

That was the average for the year just want to get that right.

So we give the annual retention number each year at the end of our fiscal year, so 92% greater than 92% revenue retention, which is very consistent number for us is for the entire 12 month period.

Understood. Okay. Thanks, a lot guys.

Thank you.

Our next question comes a lot of Brian Peterson with Raymond James.

Hi, gentlemen, who are all doing well I'm actually gets going ask one question. If you believe it or not but so it sounds like the linear already improved throughout the quarter. It sounds like July was was pretty strong I'm just curious.

Is there any commonality in terms of new business, you're adding in terms of size or hey attach rate to certain products. What's your within out I'm just curious because obviously things have changed obviously in the world. So as we think about things improving into June and July anything you can share on what drove that shrink. Thanks.

Sure, Yes, so I think overall, what I would say is the make up the customers that we are onboarding throughout the quarter really hadnt changed that much we definitely saw a little bit of delays and decisions and at times people would delay their implementation for obvious reasons as their business is being disrupted.

But we didnt really lose a lot of opportunities sometimes it just took us a little bit longer to get them across the finish line. So we still saw unit strength throughout the quarter. So small business is still moving onboard with us.

And then larger organizations. We saw also moving so I wouldn't characterize any difference in terms of industry, where market segment. Obviously, you would expect a little less activity in places like hospitality, but the thing that you've got to remember as we've only got point nearly 25000 clients little over 24000 in the market with over 600000 businesses that we can go after so I.

Think the Salesforce.

Was pretty acute at focusing on customers that probably are less disrupted and then really continue to build that activity on momentum that we saw increased throughout the quarter and then really start to get back to very very close to those pre cobot levels in July.

Makes sense. Thanks.

Thank you and our next question comes from the line of Alex Zukin with RBC capital markets.

Hey, guys. Thanks for taking our questions.

A little bit about what you saw in terms of the competitive environment or has this has the pandemic, giving you an ability to actually take market share in mind share.

Versus your competitors and I've got a quick follow up about.

On more numbers this question.

Okay sure.

You know we've been really marching down this path.

Making sure that we've got a complete single HCM solution, that's really easy to use saves our customers time and it works for small customers as well as larger customers at the top end of our market and so you know what we found is many of these features you know whether it is a more modern way to do performance management Onboarding your employee seamlessly.

Interacting with them with our community product are learning management has started to really increase.

In what we saw demand really pre pandemic and what I would say is that it's absolutely accelerated in the pandemic. Some of these newer solutions really resonating and and customers and prospects are really realizing that they need to modernize the way they are interacting with their employees. So yes, we feel like we had a good strategy ahead of time and it will.

Really serve us well as we start to.

See recovery in the economy.

Perfect, but if I look at the.

If I look at the quarter, you had a really nice to be.

The guidance as.

1 billion shout consensus for Q1, but when you talk about the assumption for flat employment levels sequentially, I think I understood that right versus what you're seeing kind of in the month of improvement to some extend the month of July is there something about your your.

Posture. This quarter, that's different were similar to last quarter with respect to conservatism or decrease visibility or and maybe also just comment obviously you didn't give a full year guide.

Your peers that neither but how are you thinking about that and what level of remind us what level of visibility you typically have at this point to the full year sure. So so let's be clear we saw a pretty dramatic reduction in number of employees on the platform in early April and we saw it come off of that bottom at a very small rate. So we are nowhere.

Our near pre pandemic levels in terms of the number of employees on our platform and so as we move into next quarter. What we're saying is we're not expecting any further improvement to that already lower number.

If you were able to take us back to pre pandemic levels. This past quarter that we just finished we would've been in the mid Twentys just like we were the last few quarters and so there as you kind of rolled that through the next quarter. That's probably one of the biggest differences between the where we're guiding to in where the run rate we were on prior it's really in that workforce.

Reduction that we're seeing.

Perfect understood. Thank you guys.

Thank you.

Our next question comes on line of some odds amano with Jefferies.

I get asked and thanks for taking my questions.

Glad to hear you guys are all doing well and perform on the quarter.

If I can maybe just on the sales.

Sales rep headcount.

That being up 14% year over year, I'm, just curious, especially given the strong new bookings trends in.

In June all things considered and then July having a record year, how should we think about that they've been growing in the low twentys before fiscal 2000. So just maybe why the slowdown in sales rep hires.

Yeah. So a couple of things I would say so first of all the the first three quarters, we were up 40% year over year and a lot of that was driven by head count, but a significant portion was driven by productivity. So we had some really good productivity trends as we went into our planning process for the next fiscal year much of which happened even pre pandemic. We felt like we could continue that trend with with.

Increase productivity, which at the end of the day.

We think is obviously more efficient and integrate we'd be able to grow the business as we went into the pandemic. We hadn't completed obviously all of our hiring we slowed down for a period of time and we rebooted that towards the end of the quarter and I think at the end of the day, we felt pretty good about being able to get to that 14, 15% kind of number based off that and.

Still see an opportunity from a productivity perspective as the economy starts to recover to kind of get back to that same runway. We were on pre pre pandemic. So that was the thought process that went into getting to to 14% increasing headcount.

Got you and then.

I know you guys.

I answered on the on it pays per control side, but I guess, how do we reconcile what we see in national employment numbers and kind of then I don't want.

They're not say V shape, but.

Do you find engine and some improvement month to month from April May June.

In your base I guess I'm, just trying to just trying to better understand how we can use made publicly available data to track that trend or what's the difference between.

Hey lost the customer base versus.

Broader employment.

End market.

Yeah I'm not so sure there is a big difference between the broader and point, we're looking at data in very very real time right. So I can look at week by week punch information for hourly workers and see how that's kind of trending so from a forecasting perspective, we have the advantage of looking at things in very real time, but if you think of the increase if the another.

Poignant rate and the number of people applying for unemployment and you start to think about where it was before and assume that we get that impact in a more real time fashion in our platform. It does actually correlate kind of fairly well and if you think of what we're saying right now as we think that there was a little bit of a recovery fairly minor that kind of.

Tie so what you're seeing nationally in terms of the reports, but things have kind of flattened and that's what we've assumed in our guidance. So I think those can generally be a decent indicator there just through lagging.

Gotcha.

As you are taking my questions and I'll turn it over to next person. Thank you again.

Thank you and our next question comes with a lot of Daniel Jester with Citi.

Yeah, great. Thanks, good afternoon, everyone.

I appreciate the update on the products on community and LMS I Didnt hear anything though about your on demand hey products. So could you give us an updated about how thats looking in this environment.

Yes, so I would say the trend pre co bid continues I wouldn't say that that would be a product that I would call out that accelerated due to covert but it has grown throughout the quarter and so we've seen more customers add on demand pay as an option for their employees.

It is still you know what I would say relatively small in terms of percentage of our total customers and growing but we saw a lot more demand for things like community and LMS and surveys than we did Brian demand pay due to covert.

Thank you and then I just want to be clear in the last call. You did talk about implementation kind of push out are you still seeing that from from new business booked or are we pass that and can you remind us historically what percentage of your bookings go live within a couple of quarters of signing of a deal.

Yes. So first of all you know if you think of the time for typical customer is three to six weeks from the time that our sales Rep, we'll get a.

Yes, and submit that order to us before they start so it's a relatively quick timeframe most of our our bookings happen certainly within that six week timeframe once in awhile to get a little bit of a larger client client that takes longer and candidly on the small into the market, we can get customers up and running in a couple of weeks. So it's a pretty quick cycle.

What I would say is as we look at the data kind of in July post the quarter.

We are definitely starting to see things get back to normal both in terms of our sales activity, but also in terms of clients going live if you really take a step back and think about it client might have signed up at the start of the pandemic didn't know what was going to happen to their business. There's a fair amount of uncertainty, but client that we're signing up in May and June that are starting in July they kind of know the in.

Firemen, they understand the impact to their business and so you get less disruption in terms of those start dates and that's what we saw play through with people generally starting on time in July.

Great appreciate the color best of luck.

Thank you.

Thank you.

Our next question comes from the line of city pedigree with Mizuho.

Hi, Thanks for taking my question.

So your Q4 revenue came in at the high end up your guidance, but adjusted EBITDA was much higher than your guidance.

But but for September quarter EBITDA guidance as this is going to below consensus. So I'm wondering if there're any expense item you saw shifted from Q4 to Q1, because I saw your R&D and sales and marketing were down sequentially.

So I'm wondering is that any kind of expenses.

So if there are on anything else, that's driving back end up second sell down.

Sure I'll, let Toby take that question.

Sure Hey City, I mean, I think I think you hit it so.

As Steve was describing earlier in the end of margin than April timeframe. When we were in the midst of the beginning of the pandemic units impacts.

We paused spending across many areas areas of the business that you had things like significant positive teeny, which lasted the quarter, but as Steve said, you had a pause on hiring as well so think about that as you know April and into May as we really got our feet under us and understood. What the environment was going to look like me, there's a lot of uncertainty in so.

We push pause on on a lot of hiring across the business that would have typically been taking place and then as you get to the.

Into the May and then in June timeframe as we got towards the end of the quarter. We started to refocus on the normal cadence of investments and I wouldn't say, we're sort of all the way back on that point, but you started to see hiring coming back and as Steve has also saying in the growth driving areas. So think about that is go to market and R&D.

Our goal is to come out of this.

Managing prudently all the way through it from a spend perspective, but when we come out of this we want to be regaining the same momentum that we came in with so I think you saw you did see a shift in terms of.

Spend in Q4, where it would have been pause.

In sort of the earlier part and started to gradually come back and then as we're coming into Q1 you have.

You have those levels and that cadence continuing.

That's great.

Then I just wanted to understand the key drivers for clients small switching that payroll HR vendors. So some of this new sales booking your talked about it's better than last year now so.

All this discussion stock at peak.

Those guys started talking about replacing that they will equal goods and just wanted to understand the new leads like post after April one of the chance you saw new clients thinking about now switching there at all.

Handled vendors.

Yes, so what I, what I would say as you know we saw from a sales perspective definitely the market get a little bit of uncertainty in early April.

And at early part of the quarter, but as we move through the quarter and clients and prospects started to understand what is this going to mean for their business. We started to see activity levels continue to increase.

A lot of the value proposition remains the same which is ultimately we're going to give you release you easy to use platform, it's going to save you time, which efficiency is really important all the time, particularly in this type of environment, but we're also going to give you ways to connect with employees that you might not have ever used before and that's the part of the equation that we think has become even more important and certainly was a country.

Tribute or two that strong July sales, what I would tell you is the strong July sales commentary was really all done up after the pandemic started so that wasn't necessarily a backlog of activity that than just came through in July that was are all conversations that we started during the pandemic and closed.

Post April so we feel good that our message resonates.

Okay and then last quick question in terms of you know that.

Thank you talked about your clients hiding back.

You guys talked about and those who applied PTP loans did you see something but clients those who maybe let people go far lower in the beginning but they hired back after they've got the pieces along any kind of trends can you talk about that so I think it the most macro level the trend was.

People were absolutely furloughing employees letting people go reducing their workforce in early April.

And then towards the end of April we started to see off of the bottom people start to hire some of those people back in some of that was I'm sure due to PPP loans.

And others might have just been to two as businesses started to reopen or figured out a different business model in some cases, and we saw that increase throughout the rest of the quarter would at a fairly slow rate.

To the point, where as we enter July and you saw this spike in a lot of different parts of the country. We've now seen that flatline again, so we're nowhere near the pre cobot levels of employment, but it did hit the bottom in April it moved up a little bit and now has kind of flatlined and I think PPP loans placed part.

In that equation, but the PPP loan doesn't have a sudden cliff where all of a sudden you see it because it depends how long you are going to be able to work through that it depends if you're going to be able to get forgiveness for the loan.

And remember legislation came out later that extended that so you could use up to 24 weeks for that so I think we've probably seen some of the impact of the PPP loan and we may have others that have gotten the loan later in the cycle and still may have.

Access to some of those dollars to be able to maintain higher levels of employment, but I think if you net all of that out that's the impact that we saw.

Thank you so much that lets call it.

Thank you.

Question comes from the line Arvind Ramnani with Piper.

Okay.

Hello.

Hey, congrats on a good quarter I just had a couple of quick quick questions here. So.

Uh huh.

Hi, good seeing any clients.

Clients that that have challenging operations adequate pricing discounts.

Yeah. So I think our pricing is very fair, so let's start with that and so if customers get a reduction in their workforce. They automatically end up paying us less that way and so I think because of that we see last conversations around pricing and so I would say we had some of that but it was relatively small not really a big enough number worth.

Calling out and we try to work with any of those customers, where we where we have those conversations but it was not a factor in the quarter.

Great Great and.

I mean, if any.

Kind of that business has some some challenges and you guys executing quite well.

But in fact, a set of.

Defense company on underlying.

Fresh fr.

From clients sign ups.

Our our some of the clients basically kind of essentially.

Who I've read some of the legacy it simply fares frustrated with.

But essentially those does legacy players and and actually.

Accelerating that.

Kind of move to Paylocity are.

Or is it more of a situation ready to these.

Kind of clients are just facing core business issues.

Distracted and John has actually slowed.

Well, so I think what we've seen as the Salesforce is kind of regained momentum it and really has had a strong July is that we're getting clients from the same usual places we used to so the traditional payroll providers the in house methods to small regional players.

We've been able to compete with all of those in our message hasn't changed a lot I think what's become a little bit more important is the fact that customers are looking for different ways to connect with employees because employees are spending more time working from home.

There is much more transparency required in terms of what shifts you are scheduled for and how you might be able to exchange that and manage that things like attesting to not necessarily having a temperature as you come into the office and so they are looking for new features probably at an accelerated rate than maybe what we saw pre coated but the concepts are the same they're really trying to find ways to save himself.

Time, and connect with employees and so we feel pretty good about the value proposition that we offered pre covert, but if anything it even a little bit stronger postcode would because of the need to really have a more modern platform.

Yeah Yeah.

That's interesting so just to look out like.

And of course, good are been whatever just kind of healthcare credit crisis kind of subsides.

Yes, I do anticipate kind of growth rates being better than what DRAM and the people would environment.

Because of the expansion.

You just gave.

Yeah, I would say if you look at last quarter, if it wasn't for the reduction in number of employees on our platform that we experienced we would have been at very similar growth rates. Prior so in that mid Twentys just like we had been in the last several quarters and so we've got pretty good momentum from a sales perspective, so assuming we can get back to those kind of workforce reduction levels, yes.

We are really confident in terms of getting back to those growth rates and obviously you start to comp some quarters. A year later that that that have been tougher quarters, and so yes, theres potential for that to bounce around a little bit as we get but as we get to a more normal environment. We've always focused on 20% plus growth the market opportunity is big enough in front of US we're investing in the right things the teams executing.

So from a long term perspective, we think we get back to that long term model of 20% plus growth.

Okay, great. Thank you good luck for that for the year.

Thank you.

Thank you I'll now turn the call back over to CEO, Steve Bullshit for closing remarks.

Yes, I'd like to just wrap up by thanking all of you for your interest in Paylocity in once again reiterating.

Big Thank you to be 3600, plus employees that we've had that have just done a tremendous job for us over the last four months and building momentum as we move forward. Thank you everybody and have a great night.

Ladies and gentlemen. This concludes today's conference call. Thank you for participating can you may now disconnect.

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