Q3 2021 Paylocity Holding Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome.
Two of the pay lots of teeth.
Q3, FY 2021 earnings conference call.
All participants lines are in a listen only mode.
If you require any further assistance. Please press star zero and I would now like to hand, the conference over to Ryan Glenn Vice President of F G and H and Investor Relations. Please go ahead.
Good afternoon, and welcome to pay lots of these earnings results call for the third quarter of fiscal year 2021, which ended on March 31st of 2021, I'm, Ryan Glenn Vice President of F P and a and Investor relations and joining me on the call today is Steve Beauchamp CEO of Pelosity and Toby Williams CFO of Pelosity.
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 and answer session contain forward looking statements. These statements are subject to numerous important factors risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward looking statements.
Also these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those and 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 the other disclosure.
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 of the business and there's a reconciliation schedule detailing. These results currently available and our press release, which is located on our website at Payless the 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-GAAP financial measures to their directly comparable GAAP financial measure because of the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.
In regard to our upcoming conference schedule, and Toby and I will be attending the Needham technology and media conference on May 17th Steven Toby will be attending the William Blair growth Conference on June 1st Toby and I will be attending the Cowen conference on June 3rd and Toby will be attending the Baird Global consumer technology <unk>.
And services conference on June eight and the Stifel Cross sector Insight 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 call over to Steve.
Thank you Ryan and thanks to all of you for joining us on our third quarter of fiscal 'twenty, One earnings call. Our solid results continued and the third quarter of fiscal 'twenty, one with the total revenue of $186 1 million and increase of 8.4% versus the same quarter last year. Despite continued COVID-19 related headwinds recurring and other revenue grew by 10.
The 7%, which included the headwind of three $5 million to $4 million or approximately 2% of total revenue due to annual W. Two billing as a result of lower employee levels at our clients in 2020, despite those COVID-19 related headwinds, we still had a strong selling season and are pleased to have started more business and the quarter than we did in Q3 of <unk>.
Fiscal and we continue to be pleased with the execution of our sales team throughout the pandemic, including at the upper end of our target market as our modern comprehensive product suite continues to gain traction with larger clients. Our sales team continues to gain momentum as we anniversary of the impact of COVID-19, with both April and new business starts and April 1st time of APA.
Ointment up substantially over last April and selling conditions continue to improve we are optimistic about the potential to return to a more normalized sales environment as vaccine rollout continues and state restrictions gradually ease across the U S and remain committed to continuing our investment and digital marketing and digital lead generation to support.
Fort the effectiveness and efficiency of our go to market motion.
Additionally, channel referrals, primarily from benefit brokers and financial advisers. Once again represented more than 25% of new business. In Q3 led by increased use of virtual broker connection activities.
<unk> and virtual gatherings that helped us maintain strong channel referral levels.
Adjusted EBITDA for the third quarter was $66 9 million or 36% margin, which exceeded the midpoint of our guidance by $6 4 million. We are pleased with our ability to be efficient with operational and G&A costs. While we remain focused on incremental investments and research and development and sales and marketing initiatives in fiscal 'twenty one.
And 'twenty two to continue our momentum and product and sales and to position us for driving future growth. Once we return to a more normalized macro environment.
Our commitment to product development, including sustained investment in R&D continues to be a key differentiator in the marketplace last month, we introduced the Pelosity modern workforce index or <unk>, a proprietary algorithm and index that analyzes scores and track the company's progress and delivering a more engaging experience to their employees.
With the goal of improving overall employee sentiment retention and productivity M.
M. W. Ay uses machine learning algorithms created by our data science team to deliver and MW of ice score that can be benchmarked versus peer companies and the same industry. We then leverage the data and best practices for more than 25000 clients to deliver customized recommendations that will improve employee engagement and increase of <unk> <unk>.
<unk> and Wi score.
And independent research study performed by Deloitte confirm that companies with the higher M. Wi scores experienced lower levels of attrition at higher levels of platform utilization drive improve workplace satisfaction and longer employee tenures.
The individuals' begin to return to the office and as the war for talent accelerate we believe driving more efficient processes and focusing on employee engagement will be a key priority for businesses and we remain committed to better servicing our clients across these areas through our expanded product suite.
I would now like the pass the call to Toby to review the quarter's results in detail and provide updated guidance. Thanks.
Thanks, Steve total revenue for Q3 was $186 1 million and increase of eight 4% with recurring and other revenues up 10, 7% from the same period last year our.
Our adjusted gross profit was 73 five per cent for Q3 with continued pressure from both COVID-19, and interest rate related headwinds, we continue to make significant investments and research and development and to understand our overall investment and R&D. It is important to combine both what we expense and what we capitalize on a combined non-GAAP basis totaled.
R&D investments were $22 4 million or 12% of revenue in Q3.
On a non-GAAP basis sales and marketing expenses were $19 four per cent of revenue in Q3, as we remain focused on making incremental go to market investments in fiscal 'twenty, one and fiscal 'twenty two.
On a non-GAAP basis G&A costs were 11, 9% of revenue in Q3 versus 10, 7% and Q3 of last fiscal year and we remain focused on consistently leveraging our G&A expenses on an annual basis.
Our adjusted EBITDA was $66 9 million or 36% of revenue for the quarter, which exceeded our guidance by $6 4 million at the midpoint, we remain committed to progressing toward our adjusted EBITDA target of 30% to 35 per cent of revenue once we return to a normalized macroeconomic environment covering our GAAP results for the quarter gross profit was 100 and.
And $28 7 million operating income was $39 1 million and net income was $36 8 million and.
In regard to the balance sheet, we ended the quarter with cash cash equivalents and invested corporate cash of $182 3 million and we fully repaid the $100 million drawdown on our revolving credit facility during the quarter.
We're pleased with our performance in Q3, which included another strong quarter for our sales team, while also identifying opportunities to demonstrate scale and operational and G&A costs and we're happy with the progress we've made to that and in Q3.
In regard to client held funds and interest income our average daily balance of client funds was $1 9 billion and Q3, we are estimating the average daily balance will be approximately $1 6 billion and Q4, and we assume an average yield of approximately five to 10 basis points in the fourth quarter.
Before reviewing guidance I'd like to provide some additional context on the current operating environment as Steve mentioned, we continue to be pleased with the performance of our sales team. This fiscal year to date and this past quarter and regards to the ongoing impact of COVID-19, we continued to see last quarter of double digit impact on recurring revenue growth primarily related to the sustained lower law.
Level of client employees on our platform within the quarter, while we did not see any improvement in January or February we did see a notable increase in client work force levels in March, particularly in the back half of the month with further improvement during the month of April.
Finally, I'd like to provide our financial guidance for Q4, and full fiscal 'twenty, one which incorporates known and some estimated impacts related to COVID-19 and.
In regard to employees per client our guidance incorporates the improvements we have seen to date, but no further increases during the remainder of the fiscal year.
For the fourth quarter of fiscal 'twenty. One total revenue is expected to be and the range of $159 5 million to $163 5 million or approximately 22% to 25% growth over fourth quarter fiscal 'twenty total revenue and.
And adjusted EBITDA is expected to be and the range of $31 5 million to $34 5 million.
And for full fiscal year 'twenty. One total revenue is expected to be and the range of $627 7 million to $631 7 million or approximately 12% growth over fiscal 'twenty and.
And adjusted EBITDA is expected to be and the range of $164 3 million to $167 3 million.
In conclusion, we are pleased with our Q3 results, particularly in the context of the current operating environment and we remain committed to investing and the business to ensure we are well positioned for a return to a more normalized macro economic environment. Operator, we're now ready for questions. Thank you.
Thank you at this time and if he would like to ask a question. Please press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
Our first question comes from Scott Berg of Needham Your line is open.
Hey, Steve told me Ryan Congrats on the good quarter and thanks for taking my questions here.
And just got a couple here Steven on the second quarter call. You commented on how your customer and additions were in line with the additions that the company saw and the back half of 19 for that six month period I didn't hear you comment on that that metric here on the call, but how should we think about the pace of adds when you're able to China.
Theme that rate, which I think was up.
19, 5% roughly year over year or was there a meaningful change one way or the other to customer additions.
Yes, Scott I think being the midpoint of the fiscal year, we wanted to give some color of that knowing that we had just kind of made it through the January selling season.
And the fact that we didn't call. It out this year or this quarter was not because we had seen of change more.
Really continued and so we've had really strong I think unit growth through the first half of the year and that ran and continued momentum and the quarter.
Got it and then Steve one of your comments was.
About the strength of your sales on the upper end of your target customer segment can you point to a factor too that might be driving better better sales. There I assume that means slightly improved win rates, but there's something about the platform or the services is really resonating well with customers right now.
Sure. So I think the investments we've made in product both in terms of modules that we've added but also some of the innovations that we've added to the platform with products like community.
And the addition of premium video and we feel like that's really resonating in the marketplace with the COVID-19 backdrop and the fact that so many employees are working remotely and many cases some of the larger clients still have enough resources, where theyre still out there of evaluating HCM platforms and looking at it and so I think it's a combination of I think the market on the <unk>.
Brand is probably a little bit more robust in terms of the earlier recovery, but more important and that is the fact that our our product investments are really resonating.
Got it and then I'll sneak a quick one and for Tobey Tobey your R&D expense and the quarter was actually down sequentially from Q.
Two and you didn't spend anymore on the capitalized R&D necessarily in the quarter any reason for that dynamics that typically doesn't happen seasonally for you.
No I mean, I think youre seeing some timing things from a quarter to quarter year over year.
From that perspective, Scott and I think what we've what we said pretty consistently is.
Throughout this fiscal year and and I think this will also be true and in the back half and and the in the last quarter is we will be focused on putting incremental investments against both R&D and and everything from a go to market and sales and marketing perspective to continue to drive future growth and I think despite timing differences that you may see that's still where the effort.
Is and I think you know as we look at getting back to 20 plus percent growth in in Q4, and and and the Tee up for next year. I think we are we're still focused on driving R&D and sales and marketing investments to drive future growth.
Great Thats, all I had congrats again.
Yeah.
Thank you. Our next question comes from Brian Peterson of Raymond James Your line is open.
Hey, gentlemen, and thanks for taking the question and good to hear from you guys.
So so tobey its nice to see the 24% growth guidance for the fourth quarter. I know you just mentioned and maybe the follow up the Scotts question that there will be some investments as we think about that 20% plus growth profile like is there any framework that you would give us in terms of how to think about the cadence of margins and as we're thinking about fiscal year 'twenty two and.
The al.
Yeah.
So I guess I think the the <unk>.
Big picture backdrop is we've talked about still being focused on getting into that $30 35 per cent range over time I still think that's the rate that's.
And that's the right framework that we would point to I think we've.
We've performed better from a margin perspective, as we've gone through the year than maybe we would've thought at the outset and I think of lot of the a lot of that comes from some of the costs that we've been able to manage through the course of this year and the pandemic, so things like T and E being down substantially and then I think.
But I think the consistency and the investment philosophy and the strategy is to continue to spend on things like R&D and continue to drive investment and sales and marketing to be able to continue to drive future growth. So I think that's that's still how we're thinking about coming through this year and I think that that will be consistent.
As we as we go into next year I think that investment focus will will remain constant and I think the one thing I would add is we're excited about what we're seeing and the market right now as we're starting to see things return to kind of pre COVID-19 levels. When you look at first time of appointments and the sales force number of leads coming in and number of clients, we're bringing on and so we definitely want to invest and take advantage of that opportunity.
And last year, there were some constraints with travel and teeny and so many other things and so you know we're definitely focused on getting into that mid 'twenty. You can see is forecasting that for for next quarter and Thats. Our number one focus and we definitely want to invest back and sales and marketing, but certainly at a higher rate than we have over this past year as well as R&D, while at the same time.
And of balancing you know our long term EBITDA objective of over time getting to that 30, plus percentage and we think we can do that responsibly.
And Steve maybe it's too early to ask this question, but if you think about the pipeline of lot of the early indicators that you are seeing any changes in into where the sources of business may come from and I'm, just curious kind of how the competitive dynamics may potentially evolve over time. Thanks guys.
So first thing I would say is we have been pretty happy with the sales force. We are absolutely sold more business and we did last year.
And but it has affected productivity a little bit right over this past year and so we're over the last couple of months particular, we're starting to see activity levels.
The amount of bookings the amount of appointments all start to get much closer to that pre COVID-19 level.
And that's certainly exciting to us no.
Big change from the mix perspective, we made the one call out that we're seeing a little bit more traction at the upper end of our target market, but we're getting the customers from kind of the usual people that we would see and the usual competitors and the market.
Thank you.
Thank you. Our next question comes from Brad Reback with Stifel. Your line is open.
Great. Thanks, Thanks, very much guys.
If you look at the pace of hiring picking up in April and as you talked about and.
And you play that through to the installed base returning to where it was pre COVID-19 on their employment levels. Do you think it takes a couple of quarters or a year plus to get back to where they were.
I think we've been hesitant to try to forecast the economic recovery and so as Toby mentioned in the prepared remarks, we basically took what we saw in April and then we played that through and incorporated that into our into our guidance. It is difficult for us to assume anything further out there obviously theres positive news in terms of vaccination.
Right.
[noise] of cases, right now, but I think that's the approach that we'll take we'll try to give you better color on as we give guidance towards next fiscal year in terms of with those set of assumptions are.
I think at this point so far what we've seen is has been a very gradual recovery whether that starts to accelerate or not is still probably to be determined in our mind.
Great. Thanks very much.
Yes.
Thank you and next question comes from Terry Tillman of Choi Your line is open.
Yeah, Hey, Steven Tobey, Thanks for taking my questions I guess, the thanks for the color Steve in terms of the April appointments up 30% youre going to get and the habit here, we're going to ask every month, how does the appointments are coming along but you know and.
And then maybe pre pandemic like what what was the good months per appointment growth year over year I'm, assuming there was growth every year, because youre, adding more of your sales capacity et cetera, but like what is 30% growth sounds like I mean, and I know, it's better than prior couple of months I assume but just a little bit more color around that and and is that a lot of that from the upper end of the.
Talk about it.
First of all of I don't think we've called out of specific number on the on it being up 30%.
So that would actually be low relative to what we saw but we're not going to call out the number of specifically so it was definitely up more than that.
And we're seeing it really across the board. So we're seeing it down at the kind of lower and of our target market, which of those those businesses. We're obviously very much impacted during COVID-19. So we're seeing that come back it's happening a little bit more and the states that are more open so no surprises there.
Mid size has also started to come back I think throughout COVID-19. The upper end of the market has probably been the steadiest and now we're starting to see kind of the mid and low end of the market really start to come back.
Yes, I just looked at my notes you said substantially somehow.
That 30% so good good call out there.
But the.
And then hit the second part of the question and then I had a follow up for Tobey is at the upper end of your target market, what's the propensity right now to buy.
Plethora of your add on modules.
Are you seeing any changes there and then I had a follow up for Tobey.
Yes, so I think what's really resonating at the upper end of the market as maybe the complete value proposition the idea of us being the most modern platform and giving our clients tools to manage a work force that's gone through a whole bunch of changes flexible schedules people working from home higher demand for transparency that value proposition is really resonating and if you look at our product roadmap over the last.
Few years, we filled in a lot of the HCM modules, we've got much more complete offering and a much more modern capabilities and so I think that has really translated in terms of both of our ability to generate leads and the upper end of the market and then ultimately translate those into into close sales and.
And that has gradually improved throughout COVID-19 to the point that it was worth of at least us calling it out.
But again, we've really got emphasize and you know, we're starting to see things come back across the entire target market.
Yeah, that's great and I guess Toby.
And maybe Steve actually mentioned this but the three to $535 million to $4 million impact I guess from lower employment levels did you talk about or quantify and <unk>. What you expect there I know it sounds like April was better from an employment standpoint, but did you actually quantify the headwind and <unk>. Thank you.
Yeah, I mean, so I guess, what I'd say is I think the three and half the $4 million was in reference to W. Twos for for Q3.
And I think that's that was the call out.
For that but I think in terms of and.
And the quantifying the employees on the platform as we're looking at Q4, I mean, I think and we didn't call out the quantification of that and he was Steve's comment was we started to see improvement mostly in the back half of March we did see improvement in April.
But we did and we carried that through to the guide, but we didn't include any incremental improvement from that point forward and I think thats consistent with how we've been issuing guidance since the beginning and and.
That's what we did for Q4 as well.
Thanks.
Thank you. Our next question comes from the Mark Marcon of Baird. Your line is okay.
Hey, good afternoon, and thanks for taking my question.
And just curious with regards to the the modules and the attach rates can you talk a little bit more about community and premium video what youre seeing there and then separately obviously, there's all sorts of stories about.
Worker shortages and demand for workers I'm wondering if you could talk a little bit about.
Your talent acquisition modules, and if youre seeing a big uptick there.
From the usage perspective, and what else you can do in order to to help companies alleviate some of the worker shortages.
Yeah. So I think on the first point, we definitely have seen throughout COVID-19 increased utilization and community now that the module that is available for all of our customers.
And really gives the ability to communicate and connect in ways that mirror, how people might communicate and their and their social lives and it's very social experience and so that has continued to grow.
We have definitely been pleased with the initial launch of premium video, which was available to new customers.
At the start of this last calendar year, that's done probably better than we would've expected and no surprise since people are communicating a lot via video today I think the other two that's done really well throughout COVID-19 and learning management surveys all of these modules that are about communicating and connecting with your employees and much more digital fashion.
Has been a consistent trend throughout.
COVID-19 and we've been really pleased with it and we continue to innovate around that idea of really truly being a modern experience for employees.
And I think the second part of your question Mark was.
Helping clients basically address the talent shortages that are creeping up across the board.
What are you seeing in terms of talent acquisition and attach rates on the outward anything new that you can do to.
And to further help for your clients.
Sure well I think you know early on and in the pandemic of module like recruiting is probably not quite as in demand as people are downsizing and trying to figure out where the businesses. We definitely of Racine seen that return back to kind of our normalized level of penetration rates.
We launched tax base features on our recruiting applications, where you can connect with candidates would be of tax which gives you a much higher response rate. That's a really good example of something that we've added to really help our customers and we will continue to innovate because I think youre right as the economy starts to recover it will become more challenging to be able to find the talented <unk>.
People that you are looking at especially in growth markets.
Great and then just on the upper and when you're talking about the upper and are you talking all the way at the took the top of your of your range or are you talking kind of the midpoint to the upper end and.
Who are you winning from or the.
Because we've heard obviously from the.
The big.
Incumbents that we all know.
They've been talking about increases in terms of the retention rate so I'm wondering.
And how that coincides.
Sure. So you know, we basically do not cap of our sales force, it's really about of product fit to the customer and so we are focused up to 1000 employees, but in many cases and for many years, we'd bring on customers above the 1000 employees and so I would say you know it's really the upper haps was 500 plus.
And we have customers with several thousand employees and we have a number of customers with thousands of employees on the platform and so we've probably seen a little bit more momentum at the upper end of our target market and even beyond and then maybe we had seen 12 months ago and we felt like that was probably worth of call out because that was of particular strength.
In the quarter.
Great and.
Who are you taking away from.
No no real big differences, there and we continue to see you know some of the service Bureau providers, we continue to see in house offerings.
And once in a while you run into some players and the enterprise space that we don't typically run into but it's still fairly infrequent.
At the end of the day I think our product suite offers a level of of difference, where if we get pretty far and the process you won't see some of the enterprise folks alongside of us.
Great and then just for next year should we think about things like travel and entertainment really.
Creeping back in other words.
Should we expect margin improvement next year or is it possible that we're going to with the sales of additions and maybe some expenses coming back.
Maybe we have a lower level of margin expansion next year than normal yes.
Yes, I think Thats a good question first we're really excited about continuing to invest and grow.
And about the momentum that we're seeing and the market and and you can see that we have not grown maybe places like sales and marketing and R&D and the way we would normally would we had kind of done the pause early and COVID-19. We've been certainly working at increasing those numbers since then.
We are in investment mode and at the same time, we're going to be Comping of time period, where we haven't had a lot of travel people weren't moving around and they weren't getting together, we want to get our people back together, we don't envision everybody being the office of the same way it'll be more of a hybrid environment long term, but we absolutely think getting people together driving the culture.
Is absolutely going to happen. So it probably becomes a tougher margin year next year because of that but from a long term perspective, it won't really hinder our ability to get to our long term model and we think that that's the right type of investment because of the opportunity is still very large and front of us right.
Great. Thank you very much.
Thank you. Our next question comes from Bryan Bergin Cowen Your line is open.
Hi, guys. Good afternoon, I wanted to follow up on the employment related headwinds on the prepaid on the client base and just trying to understand the magnitude of this improvement that you saw through April is the is it still assumed to be of double digit headwind to recurring and the <unk> or is that kind of move into the single digits. It's.
It's definitely moved into the single digits I'm not sure we want to get into calling it out specifically there was theres different elements, it's mostly driven by employees on the platform.
I think about it as gradually getting better and slowly moving out of those double digit and then obviously being less so into next quarter.
So thats, probably kind of the the right way to think about it you can kind of see it obviously and our our guide right. We're back into that mid Twenty's kind of guide.
Obviously, we're anniversarying kind of that COVID-19 period.
But.
Our anticipation was what we saw through April we didn't include any anything else in terms of the assumptions for the guide, but so far it's been kind of slow but steady recovery.
Okay. That's helpful. And then can you give us a sense on where the sales head count stance and how would you say you're doing and its environment, adding new sales professionals.
Yes.
So I think as I mentioned earlier, we had a bit of a pause early last fiscal year just in terms of hiring and you know we definitely felt like the sales team was doing well in the in the COVID-19 environment and we started to kick that back up. This is really our hiring season that we're in right. Now so spring is really where we really do a lot of our <unk>.
And so that we can go into next fiscal year with the right number of head count.
We feel pretty good about the progress that we're making we will give you more color on the next call in terms of where we're at but I would say so far so good.
Thank you.
Thank you. Our next question comes from not Tomorrow of.
The Jeffries your line is open.
Hi, good afternoon, and thanks for taking my question so maybe on.
And the product side.
Think about the company's last couple of tuck in acquisitions did we get an update and maybe just where the the back and the integration process and.
Kind of.
Along with that gross margin bump and it bumps up seasonally in the March quarter, but it was actually quite a bit ahead of what we were looking for so are we starting to see gross margin gains there as those integrations are completed.
So I think overall as customers buy more of the HCM modules, we have historically gotten the lift in gross margin.
And so if you think of something like premium video a lot of the work is on the product side less of the works naturally going to be from the support perspective, because once we turn that on for you you've got video embedded and different parts of the application and you can start taking advantage of that and it's really easy to use right and so that's kind of of the goal that we have with a lot of the new model.
And so as module penetration increases that's certainly going to be one of the primary drivers of growth margin. We also mentioned we had pretty good expansion of up surveys and learning management throughout COVID-19. So another good example.
And then I think there is some element of there is some some travel and expense and so on that we do even and the gross margin line not nearly as much as you would see and maybe sales and marketing, but there is an element of you know from a cost perspective, we certainly didn't take on any additional facilities or anything that we might consider and normal head count growth environment. So I think theres a low.
Bit of cost benefit from it but it's most of the is coming from the module penetration of these these newer modules.
Great and then as I think about maybe the the historical trend between kind of the rack rate P. P y.
And.
And kind of realized pricing.
And you add more of these modules are you starting to see kind of better conversion there or how should we think about like the effectiveness of the the add ons sticking in terms of.
The price uplift or P. P wireless.
No I think what we have historically found is when we release of module, we're pretty confident that with a little bit of time, we can get that thing into 10% of our customers and then grow it from there and we've had pretty good success being able to do that.
And some products will accelerate much faster than others, and some take a little bit longer right and so overall when I look at all of the modules and how we're doing from a pricing perspective in terms of getting that realized P. P y.
It continues to increase and we feel pretty good about that now at the same time during COVID-19, you've got less employees on the platform. So you've got some some mitigating circumstances, there, but I think from of module penetration and the utilization that we're seeing from clients of those modules on our platform. We're very encouraged.
Great and I can add.
And I apologize in advance of squeezing one more one more and I don't normally we're down to two but just as I think about.
Cash are we starting to see any changes and trends there.
And especially with retention.
And then I mentioned earlier at some of the incumbents, increasing and the fight for adding more units any changes in your cost per acquisition costs that we should be aware.
Well I don't think he smiled and I don't think.
We've been pretty consistent from a retention perspective, and so I think we've seen relatively consistent client retention rates throughout the course of the pandemic I think that consistency you would have would have continued through.
Q3, and then I think just go back to the to the investment and comments that I and Steve would've made earlier and the column and the prepared remarks, Matt I think we are still remain focused on investing.
And in sales and marketing that's true of this year, obviously Steve's referenced a couple of times of the timing.
Difference in the year in terms of being a little bit lighter because of.
Pauses.
At this point last year, but I mean, I think as we look at.
Q4, and as we look at next fiscal year, we and the effort is to get back on pace with investments and sales and marketing and that's all focused on being able to continue to drive growth into the future.
Great. Thanks, again for taking my questions.
Sure.
Thank you. Our next question comes from net of William Blair. Your line is open.
Hey, guys. Thanks for taking my questions just one for me and on the competitive environment I'm wondering if you've seen any changes and your competitive win rates I think one of your competitors was out there talking about.
<unk> seen better win rates. So just wondering what you guys are seeing out there and the market.
Yeah, I think what I would tell you is I think our win rates have been fairly consistent over time not necessarily a lot of change there I think what the callout is we're seeing more activity. So more first time of appointments more deal flow more activity.
And that's probably the part that's more encouraging I think we feel good about the win rates that we've had and the consistency that we've been able to deliver.
<unk> versus our competitors and wouldn't call out of change there.
Great. Thanks, guys.
Thank you. Our next question comes from Robert Berlin, Rvs, and the RBC. Your line is open.
Hi, great. Thanks for taking the question.
You gave the forms had windows, three and half of $4 million.
And just wanted to check the two things that was versus trend right and not year over year and does that include both.
W Twos, and ACA related filings and the kind of thing.
So the three and half the four was the actual impact in the quarter.
And in dollars and that was.
Related to W. Twos.
And that's the.
Almost all of it yes.
Okay. So was there also like the additional ACA impact as well for the.
And you know one form of filing requirements. So the ACA impact would've been embedded in kind of the employees on the platform on an ongoing basis, because we typically most of the clients, we bundle that as and ongoing service of rather than just charge and one time it gets spread out throughout the year.
Got it okay, great. Thanks, and then you mentioned retention.
Pretty consistent but can you give a little more color there.
Are you still seeing some businesses that dropdown does their employees and they are sticking around and plumbing and paint the very low minimums, but they haven't turned you off or whats yeah.
All of the useful at.
At the detailed question for sure.
Yes retention has been strong overall right. When we're generally focused on revenue retention being above 92% and we continue to see that it's been a strong year for us from a retention perspective, we do manage the clients that might go down to no employees and and tell us Hey, I knock on the processing payroll for the next month I don't.
I'm going to pay you some minimum amount, but we are pretty quick and going back at those clients and making an assessment as terms of whether theyre going to continue and so we would never have a buildup of customers who are not doing anything on our platform for any period of time, we would actually take those as of loss and re engage them when their business came on and if we had to but it's a really small number small.
Number of clients and and very small amount the amount of revenue.
Got it great. Thank you.
Thank you. Our next question comes from Alex Zukin with Wolfe Research. Your line is open.
Hey, guys. Thanks for taking my question I'll try to keep it to just the two.
So maybe just stepping back a little bit Steven as you think about where your pipelines are where your pipeline coverage is when you were going into the pandemic you started really seeing almost and acceleration.
And some of those metrics and the execution.
At a point now where we're back to that kind of pre pandemic.
New sales execution mode and are you seeing anything like as the almost like a coiled spring of people that were hesitant to move that maybe now as budgets of loosened the environments, maybe reopen there's a little bit more willingness and and so there's almost like a pent up demand type of situation.
Well, it's hard to know exactly where we sit right now so what I would tell you is going into the pandemic, we called out. The fact that we were over 40% bookings versus the prior year, we had significant amount of momentum and that was both and activity and then obviously in terms of getting those customers started.
What I would tell you is throughout the pandemic. It certainly is a little bit more of a challenging sales environment, but it's a big market and a big opportunity. So we were able to focus on industries and states, where those opportunities existed and still continue to have what we thought was pretty good growth. We are now I think more recently, meaning the last couple of months and maybe not uniform and.
Across the country, but as different markets have reopened and activity levels have certainly increased and.
And we see that both in the first time of appointments and bookings.
And we're probably not quite at that pre pandemic level, yet, but we feel like we're heading towards it and and that's giving us the reason for the optimism.
Got it and then maybe just one for Toby if I look at I realize we're not giving any guidance for next year, but if I look at the the tailwind and the business.
<unk> the <unk>.
The period, you're getting a little bit of a of a boost in productivity of youre getting some incremental modules that youre now able to sell youre seeing some recovery at least and float and interest rates some recovery and employment trends is there anything that should be different about the seasonality of the business sequential growth from a.
The growth perspective, as we think about the shape of fiscal 'twenty, two or any elements around why we couldnt see a little bit heightened growth trajectory versus previous years.
Well I mean, theres, a lot and that question and I mean, I don't think there's anything structurally different and the business that would give you of different shape to the things that you watch you know on a quarter to quarter basis throughout the course of the year I think the only thing I'd say and awful lot of the things that you mentioned.
And our early days of tailwind and they're pretty hard to.
Foresee how exactly those are going to play out from a timing standpoint, and the course of next year or if they do I mean, and so I think youre hearing optimism from us in terms of what we've seen in March and in the back half of March and April.
Certainly.
And would be great for the world to see those things continue it's hard to.
Necessarily quantify how theyre going to play out next fiscal year or the timing that you might see associated with them, but there's nothing structurally different and the business.
From a if you're in steady state perspective so.
Understood. Thank you guys congrats on a good quarter.
Okay.
Thank you. Our next question comes from Steve <unk>.
Right.
Your line is open.
Hey, guys. This is actually Matt Diamond on cities behalf. Thanks for taking the question I wanted to ask Alex's question, a little bit differently. It was noted that premium video and the the modernity of the platform is starting to resonate I am very curious it would I would imagine that the customer base is going to start thinking about of return.
And to the office as most of corporate America has does that have any ramifications for your sales cycle would people consider premium video and learning management systems at least the modernity of those any different priority wise as in person interactions resume and people are.
More than pixels on the screen.
So I think the conversations that we've been having with our customers. As you mentioned everybody is trying to figure out how theyre going to do this particularly and the knowledge worker economy, where they can be effective from home most of the conversations that we've had with people is that that new normal.
Is some sort of hybrid and so what that means is maybe I was in the office five days of week now I'm going to be and the office three days of week, maybe Ive, just got more flexibility around what my scheduling as well.
We've come to a level of trust and we've been able to see what productivity can look like from from work from home from the scenarios and it's I think it's going to be difficult to be able to keep that.
And returned back to the way it was before particularly as the economy's growing and and finding the right talented people is going to be of challenge. So I think that those products are going to continue to resonate.
Even if people are back and the office for some period of time and actually they could become very important as part of driving your culture in an environment, where you don't have everybody and the office every day and so we feel like that trend will very much likely continue based on the conversations we've had and that certainly what it is going to look like here of Pelosity.
Understood and the.
Dovetails really nicely into my next question does that the the.
Plans for your own virtual sales approach and the second half and it was alluded to earlier as T&D potentially comes back has that been dialed into a point, where the virtual sales approach could be something that's long standing and none of it wouldn't gradually fade away as reopening pervades more and more.
Yeah, you know what I would tell you is.
The great thing about sales people as they're very creative they're entrepreneurial and they want to follow where the market is to find the revenue and so what I mean by that is if customers are much more comfortable having in person conversations and they want to move that way then our sales force is certainly ready to do that and and there are absolutely cases, where theyre having on site appointments today. The salespeople also recognize that if they can do that.
Virtually and avoid the drive and the customer is very comfortable they'll do that and so we want to make sure. We RMR salespeople with all the tools they need to be successful either virtually selling clients.
From their home office as Theyre doing today or getting back on site with customers and making sure that we can do it the way that the customers are most comfortable I think like my answer before youre going to see a bit of of hybrid and the bit of a new normal where it's going to happen both ways and we're going to make sure that the sales reps are ready to do it either way.
Excellent. Thanks, so much guys.
Thank you. Our next question comes from Jeff Van.
Pantry of Craig Hallum. Your line is open great.
Great. Thanks for taking my question just one for me on the quarter in terms of the variance could you just maybe a little finer point on it I think you had about $1 million of revenue upside give or take but about six on the EBITDA side and maybe just spend a second there in terms of the variance around margins and spend just sort of a little more clarity on the quarter itself.
Sure. So some of the variance certainly comes from the fact that we've got a little bit of recovery rate at the end of the quarter says as Toby said more of the back half of March. So that's certainly a smaller portion of it and then you know we were hopeful at the start of the year that we would be able to be back to travel and doing some of the meetings and have much more in person contact so as we kind of.
And in the quarter, we were able to do better from an expense perspective, and then I think lastly tomorrow.
To my earlier point some of these products that we're able to get higher penetration rates are driving some margin expansion. So you saw that in gross margin. So I think it's a combination of factors that have translated to a bigger beat on adjusted EBITDA and we had and revenue.
Yep.
Fair enough. Thank you.
Thank you. Our next question comes from all of Us Armani.
Of Piper Sandler Your line is open.
The taking my question and congrats on a good quarter.
And I just wanted to.
And I ask all of the competitive environment.
Another question and that's been asked a couple of times, but what I'm really looking to understand us.
It was certainly in the like some of the more legacy players like ADP and paychex have been making investments on <unk>.
The.
Solution more of kind of cloud and more.
And then and then you had some of the more niche players whether it's.
The car or a bamboo.
Kind of really kind of come at it from a from a.
From a different perspective.
Have you have you kind of seen.
You know kind of increased competition from either of these two groups and and the follow up is.
From.
Our product roadmap perspective, do you feel you are making the right investments to kind of keep ahead of the competition over the next couple of years sure. So I think on your on your first question. Its always been a pretty competitive environment. I think it's pretty typical of that a customer is going to look at two or three providers our size market, they probably can't handle evaluating of la.
More than that so that's always the case and yes, you see the bigger players in those deals all the time and some of the newcomers we're used to competing with and as I mentioned earlier, we have not seen really of change and our win rate. So we've been pretty effective throughout the pandemic in terms of competing I think your second point on we really do believe that some of the bigger macro trends in terms of work from home.
Increased flexibility Gen Z entering the workforce and having different demands on their employers and people wanting tools at work that feel like their tools at home, all really bode well versus our product roadmap and so we're excited about what we just launched with our modern workforce index, where we actually have a recommendation proprietary recommendation engine built and the scoring.
Model that will allow people measure of their progress in terms of how effective they are with their communication and how engage their employees are and that's an example of something that's pretty unique and innovative that combined with what we've done in community. We think is of good proof point of us really being one of the more modern platforms. If not the most partnered platform in the marketplace.
And I think those trends are going to absolutely continue and this new hybrid work environment and we feel really good about the investments we've made and our data science team.
And community in video even with the most recent acquisition, which is still in the integration process of same page all really speak to that modern employer.
Terrific and.
And Steve I know like but and we met and 2019.
And are excited of what community and video and suddenly.
And you probably didn't anticipate the pandemic at that point, but suddenly and kind of usage of this most of it must have gone up with the with their clients, but kind of.
Have you kind of dig and look at the product roadmap over the next couple of years at the certain areas, where you need to sort of make.
The good investments and a lot more quickly than if the pandemic had not happened.
Yes, it's a good question I would I would call of our data science team and some of the stuff we've done around the algorithms and machine learning I mean, one of the challenges customers have and this was brought up earlier and they're not sure oftentimes with to do especially the average customer at the little more than 100 employees and so now I've got employees, who are only and Monday, and Wednesday, and other employees are and Thursday, and Friday and I've got this whole flexible schedule environment and.
I've got younger people entering the workforce and.
I'm, having a hard time connecting with them and so we're really excited about actually leveraging the data that we have from the more than 25000 clients on our platform and figure out who's got the lowest turnover who's got the best practices, and then being able to surface that to our clients. So that they know what they do so they know how to use community. They know what the post they know how employees are going to engage and.
So this idea of investing and data science, and then really helping our clients with best practices. If we do that well those clients are going to see.
Higher retention of their employees and theyre going to get more productivity for those employees that stay longer and we think that's a really powerful value proposition.
Yeah. It makes a lot of sense. Thank.
And thank you very much and and good luck for the rest of the year.
And.
Thank you I'm showing no further questions at this time I'd like to turn the call back over to Steve Beauchamp.
Pelosity for any closing remarks, yes.
Great. Thank you just take a brief moment to thank all of you for your interest and Pelosity and definitely want to thank our nearly 4000 employees across the country, who have been working hard journey during a very challenging time. So hope everyone has a great evening.
Thank you.
Ladies and gentlemen, this does conclude today's conference. Thank you all for participating you may all disconnect and radio.
Okay.
And.
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