Q2 2022 Paylocity Holding Corp Earnings Call
Good day, and thank you for standing by and welcome to the <unk> second quarter fiscal year 2022 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation there will be.
A question and answer session.
Ask a question during this session you will need a press star one on your telephone please be advised that today's conference maybe recorded.
Require any further assistance. Please press Star then zero I would now like to hand, the conference over to your host today, Brian Glenn <unk> Senior Vice President of Finance. Please go ahead.
Good afternoon, and welcome to <unk> earnings results call for the second quarter of fiscal 'twenty, two which ended on December 31 2021.
Brian Glenn <unk> Senior Vice President of Finance and joining me on the call today is Steve Beauchamp CEO of <unk> and Toby Williams CFO of philosophy.
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 results projected in the forward looking statements.
For additional information please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures, we do not undertake any duty to update any forward looking statements.
Also during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing. These results currently available in our press release, which is located on our website at <unk> Dot com under the Investor Relations tab and filed with the secure.
He's an exchange Commission please.
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, Steve will virtually be attending the JMP Securities Technology Conference on March 7th and I will be in Florida attending the Stifel Executive Summit on March 7th and the Raymond James Institutional Investor Conference on March 9th. 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.
You Ryan and thanks to all of you for joining us on our second quarter fiscal 'twenty two earnings call.
Our differentiated value proposition of providing the most modern software in the industry coupled with strong sales execution resulted in our second consecutive quarter of 34% revenue growth total revenue was $196 million or <unk>, 34% growth over Q2 of last year, beating the top end of our guidance by $6 5 million our sales team can.
To build momentum across all segments of our target market and delivered record selling season results, which position us very well headed into the back half of the fiscal year.
Adjusted EBITDA for the second quarter was $46 6 million or 23, 8% margin and exceeded the top end of our guidance by $4 6 million as discussed last quarter, Our award winning and remote friendly culture is resonating with prospective employees and we continue to hire successfully across all areas of the business, including sales and marketing R&D.
And operations.
From a product perspective, our sustained investment in R&D continues to pay dividends in the marketplace is our value proposition of providing the most modern product suite resonates with clients and prospects are products focused on the modern workforce, including premium video learning management surveys community and modern workforce index continue.
C increase attach utilization and conversion rates companies focused on digital transformation find our products, particularly compelling using products like premium video and community as examples.
We continue to see utilization increases with monthly premium video creation hitting a record high in the quarter. While we also saw a record number of monthly active users in our community product lastly clients are seeing higher employee engagement as a result of the action oriented recommendations from our machine learning powered modern workforce index, which we provide to all of.
Our clients.
We are also focused on continuing to drive innovation and differentiation through our integration strategy in January we completed the acquisition of cloud snap a low code integration automation platform that enables the development and deployment of API integrations cloud snaps technology will enable pelosity to deliver modern integration and seamless data sharing between critical CIS.
<unk> more efficiently and effectively while helping to unify and automate business processes across HR finance benefits and other systems. Our continued investment in providing best in class integration capability supports our strategy of automating the exchange of data for our clients between critical systems.
We believe this value proposition will also resonate with our channel partners as cloud SAP will expand the breadth of solutions our clients can seamlessly integrate with.
From a financial perspective cloud snap will not materially contribute to our revenue, but will represent a headwind of approximately 10 basis points to adjusted EBITDA in fiscal 'twenty, two which we have factored into our updated guidance.
Our value proposition of providing the most modern software in the industry is resonating throughout our target market and increasingly so with prospects who have greater than 1000 employees given the success, we're seeing at the higher end of our market and the fact that today, we serve a significant number of clients with more than 1000 employees. We are raising the high end of our target market from 1000 employees up to 5000 employees.
The second fiscal quarter is also a very busy time of year for our operations team as they work closely with our clients on year end processing of payrolls W. Twos, $2 95, and annual tax form filings to federal state and local agencies.
I want to thank all of our employees for their hard work and dedication. During this very busy time of year I would now like to pass the call to Toby to review the financial results in detail and provide updated fiscal 'twenty two guidance.
Thanks, Steve total revenue for Q2 was $196 million, an increase of 34% with recurring and other revenues up 34, 1% from the same period last year as Steve noted our sales team had another strong quarter and we were pleased to come in at $6 5 million above the top end of our revenue guidance.
We continued to make significant investments in research and development and to understand our overall investment in R&D. It is important to combine both what we expense and what we capitalize on a dollar basis, our year over year investment in total R&D increased by 21, 6% when compared to the second quarter of fiscal 'twenty, one and we remain focused on making incremental investments in R&D throughout <unk>.
'twenty two as we continue to build out the pelosity platform to serve the needs of the modern workforce.
In regards to our go to market activities channel referrals, primarily from benefit brokers and financial advisers. Once again represented more than 25% of new business for the second quarter as we continue to leverage both virtual and in person broker meetings and events to help us maintain the strong source of referrals.
On a non-GAAP basis sales and marketing expenses were 23, 7% of revenue in Q2, and we also remain focused on making incremental investments in this area of the business in fiscal 'twenty two to drive growth.
On a non-GAAP basis G&A costs were 13, 3% of revenue in the second quarter versus 13, 4% in the same period last year, we remain focused on consistently leveraging our G&A expenses on an annual basis.
Our adjusted EBITDA was $46 6 million or 23, 8% of revenue for the quarter, which exceeded our guidance by $4 $6 million at the top end.
We remain committed to progressing towards our adjusted EBITDA target of 30% to 35% over time.
Briefly covering our GAAP results for Q2 gross profit was $125 2 million operating income was $8 1 million and net income was $9 9 million in regard to the balance sheet. We ended the quarter with cash cash equivalents and invested corporate cash of $84 1 million. Additionally in January we drew down $50 million from our revolving credit facility to.
<unk> the cloud snap acquisition.
In regards to client held funds and interest income our average daily balance of client funds was $1 8 billion. In Q2, we are estimating the average daily balance will be approximately $2 2 billion in Q3, and we assume an average yield of approximately five to 10 basis points in the third quarter. Additionally.
Additionally, please note that our guidance does not include any revenue or profitability benefit from potential future interest rate increases that may be implemented by the federal reserve.
Overall, we're pleased with our performance in Q2, which included another strong quarter for our sales team, while also identifying opportunities to demonstrate scale and operational and G&A costs as Steve mentioned, we continue to see success in hiring across our business, including in key areas such as R&D sales marketing and operations, we expect to continue investing in head count.
Across all areas of the business in the back half of the fiscal year to ensure we are well positioned to drive growth and scale. The business with that said I'd like to provide our financial guidance for Q3 and full year fiscal 'twenty two for the third quarter total revenue is expected to be in the range of 239 million to $243 million or approximately 30% growth over third quarter.
Fiscal 'twenty, one total revenue and adjusted EBITDA is expected to be in the range of $77 million to $80 million.
And for full year fiscal 'twenty to total revenue is expected to be in the range of $829 million to $834 million or approximately 31% growth over fiscal 'twenty one.
And adjusted EBITDA is expected to be in the range of $220 million to $224 million, implying an adjusted EBITDA margin of approximately 26, 7% at the midpoint and note that we are maintaining the margin percentage guidance. Despite the roughly 50 basis points of dilutive impact of blue marble and cloud snap and.
In conclusion, we are pleased with our Q2 results and we're also pleased to raise the fiscal 'twenty two guidance to 31% revenue growth at the midpoint, which in combination with the adjusted EBITDA margin represented in our full year guide puts us above the rule of 50 in fiscal 'twenty two 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 to withdraw your question. Please press the pound Kim please standby, while we compile the Q&A roster.
Our first question will come from Scott Berg with Needham <unk> co. Please go ahead.
Steve and Toby Congrats on a good quarter here.
I guess, Steve let's start with your comments about moving to the top end of your target segment up to 5000 several years ago, you move down market to customers that.
We're down to maybe 20 now youre moving up market I guess, how should we think about your pace of investments. There. How prepared are you today versus this is something you should expect to be I don't know more of that come two to four six quarters from now you'll help us kind of think through what that looks like for you.
Yes, so I think very much like our move down market to move upmarket as happened naturally overtime. So as the strength of our product portfolio has improved and we've added all of the different modules and of course, we really doubled the amount of product that we sold since we've become public a lot of those products have become stronger because we continue to enhance them year after year and quarter.
After quarter and they start to become more competitive in the 1000 plus market and so if you look at over the last really over the last 234 years, we've become more and more competitive we've never capped our reps in terms of being able to sell those clients and sitting here today, we have a significant number of clients over 1000 employees and find yourself can be competing more frequently in that market. So from.
Our perspective is just naturally occur over time and as we continue to make those investments in R&D, which is really important part of our growth strategy. We think that will continue to have success in that market and we felt like this was the right time to just make that more visible to the street that that was part of our go to market motion.
Excellent and then from a follow up perspective, Steve you had given some good customer engagement kind of statistics and data.
Early on in your pre scripted remarks, but how should we think about the retention of those customers maybe versus some customers that aren't using those modules or maybe don't have similar kind of engagement with their own employees do you see a significant difference there that you can quantify or qualify or maybe not thinking about that the right way.
Yes, So I think we're still a little bit early in the cycle with a lot of these modern workforce products. So we've definitely seen higher attach rates of video we've seen higher attach rates and learning management and surveys and community, which is a free part of our platform's utilization is increasing significantly.
Certainly our theory is the more we can get employees involved in the more that we can offer additional capabilities to our customers that are looking for both digital transformation and engagement then those customers are more likely to stay with us I would say the early signs are that are positive in that direction, but I think that the benefit from those initiatives are still to come.
Since we are we're seeing such an uptick.
Call it over the last year, maybe 18 months or so.
Great Thats all I have thanks for taking my questions. Congrats again.
Thank you. Our next question will come from Terry Tillman with Chile. Please go ahead.
Hey, guys. This is Joe Meares on for Terry Thanks for taking the questions.
I was just wondering how is it really customer feedback with the recently released new scheduling tool the COVID-19 tracker and diversity tools and Denise drive higher Asps or is this more just a differentiating factor.
That customer is actually get for free.
Sure so.
Those are all included in the platform and free and available and so I think they definitely drive differentiation and we've had good receptivity of all of those I would say the Covid tracker obviously.
<unk> was launched on the idea that there would be legislation mandating a lot of customers to track that we still get usage from some of our customers who are choosing to track that but that is not necessarily nearly what we would have forecasted had that law.
<unk>.
But it still provides great differentiation that highlight some of the workflow capabilities that we already have built in the platform. So you can look at something like Copa tracking and find other use cases to be able to use those capabilities. So it definitely is a differentiator.
That's super helpful. And then just a follow up you posted 24% EBITDA margins targets, 30% to 35% could you just remind us and investors what are the biggest puts and takes in the P&L that gets you to that range over time and is it a timeframe thing or is it like a revenue size thing how should we think about timing on that.
Yes.
I think we remain committed to the 30% to 35% margin target think thats achievable over time don't think that is a ceiling.
But I think if you go back to the pre Covid time frame, we were making pretty consistent.
<unk> from a year over year EBITDA leverage standpoint, and we were just below that 30% Mark I think you've seen a bunch of noise certainly over the last call. It 18 to 24 months introduced by Covid, but I think we still believe that.
Post COVID-19 .
Over time get to that 30% to 35% range and I think as it relates to this year.
Sure.
Calling it flat.
Just under 27% and.
I feel like we're in a pretty good path this year performing against that especially in the context of.
Essentially.
Maintaining that margin guidance in the context of also doing two acquisitions that are providing roughly 50 basis points of headwind to that so still it's still the same I think target over time certainly.
This is a business, where you get margin leverage with scale and so the other part of your question is there is time, but Theres also you get the benefit of scale with larger revenue size. So.
I think the growth profile remains as we've described it in the margin target does too.
I appreciate all the color. Thanks.
Thank you. Our next question will come from Brad Reback with Stifel. Please go ahead.
Okay.
I believe with last bad well go to Pat <unk> with JMP. Please go ahead.
Oh, great. Thank you and congratulations you guys.
And so Steve.
<unk> $34 $34 30, I mean, I know the comps are easy but.
You've always sort of.
Hello.
Insistently guided us to suggest this is sort of a 20% plus grower.
Something changing or is it just easy comps.
Yes, So I think if you go pre COVID-19 , we had kind of accelerated probably from kind of 23%, 24% just above 25%. So we were kind of in that mid <unk>. We definitely are focused on 20% plus from a long term model perspective that still seems to be our target and then during COVID-19 .
The main reason is any less employees on the platform you saw that go down to the low teens and now we have the easier comp as you mentioned and so two quarters of 34% certainly feels good.
But I would tell you the business feels pretty normal to what it did pre COVID-19 .
Just the momentum that we've got in the business the way we're growing the business.
And so I don't necessarily think fundamentally our long term model has changed because we've gotten a little bit of an acceleration we.
We will see if we can certainly right some of that momentum and we feel good about the guidance going forward. So it's easier comps is a little bit of momentum in the business and it is kind of getting back to what we were doing before.
And what do you staff.
Think about staffing up on the sales side and building your quota capacity what are your target in terms of the growth of that.
So that part of the equation ends up being what do we think we can do from a productivity perspective, and so we always love the idea of being able to drive productivity. We were on a good productivity pace post or pre Covid and then COVID-19 hit that bounced around on us and we called out the last couple of earnings call that we're very close to pre COVID-19 levels of performance in the sales force I would tell.
You that were actually seen productivity increases in the sales force again, which is very encouraging. So we'll take that we'll factor that into next year and I would think about it the same way we've done historically, which is kind of a similar number of reps that we add.
To be able to kind of get us to our financial targets and get back to productivity increases, which is great for us to see.
Okay, great. Thank you.
Yeah.
Cool.
Do we have another question.
Operator, do we have another question.
I think if you just wait and just waiting to get somebody into the queue here should just be a second.
Okay.
Okay.
Okay.
Chris.
It seems like we're having some technical difficulty getting someone in the queue, we have somebody yet.
Yeah.
Yes.
Yes.
Okay.
Well, we're definitely having some technical difficulties, we are going to have to dial back anything.
Yes.
Okay.
Alright, we're online with the operator, we're trying to figure out what's going on so I. Appreciate your patience here, we can get the next question in the queue.
It seems like we do great with zoom calls all days, but somehow we are struggling with the old fashion conference call.
Okay.
Do you get a message from what you can still hear me. So that's good.
But we can't hear you and we can't get somebody into the queue. So we're online with the operator messaging back and forth trying to figure it out.
So we have any stories you want to share while we're waiting for the <unk>.
Next question.
While we're sitting here in Schaumburg and it has been a cold and snowy couple of days so.
Bearing out the blizzard spend here.
Do you think I should be recording a podcast or something now.
And our next question comes from Bryan Bergin with Cowen.
Yes.
Hi, guys Jeremy.
We have we plan and we got company. Thanks for your patience.
Thanks for keeping us on our toes.
First one for demand so clearly it sounds like it was real strong in <unk>, but did you see any change in the number of meetings or any change in client decision, making later in <unk> or thus far in <unk> just due to Macquarie.
Yes, so I would say, we didn't see impact from Amazon.
Whether that was with in our client base and the number of employees that were on the platform or even in our sales motion. We had a really strong January such a big sales.
Sales month for Us and we're really pleased with sales going into January and then with our starts in January .
Our ability to guide strong for the back half of the year. So I wouldn't say anything changed from number of meetings or activity in the market. It definitely feels kind of very pre COVID-19 like in terms of getting back to the normal number of meetings and activity levels in the conversations that we're having with clients I think.
A market like this with really tight labor.
Human capital management is a hot topic and I think it's at the forefront of people trying to figure out how do they attract and retain talent and so I think that part of the conversation is certainly elevated and become more important but definitely pre COVID-19 level of activities.
Okay. That's good to hear and then just on the formal raise of the target market for 5000 can you just talk about a bit around the.
The sales cycles, and the implementation timeframes of clients in that kind of one to five K level versus your average client size in that prior target market.
Sure So as I mentioned earlier the.
The prior question, we've been in that market for a while we definitely see our most experienced reps really tackle those opportunities and so it does have a larger sales cycle. Our typical sales cycle of about 100 employees more like 60 days and so that can be measured in some number of months it could be three to six months on a sales cycle.
In that upper tier in the 1000, plus and then from an implementation perspective.
We're typically in that 100 employee customer, it's really going to be kind of almost 3% to six weeks to get somebody up and running and live and so we can do the larger clients in six weeks, but what we find with what the customers' needs are and the complexity. It's typically going to be more like eight to 12 weeks, depending on that customer and we have our most experienced people.
<unk> already dedicated we have processes already established for those larger customers.
And we have different level of handholding that goes into those customers that.
It allowed us to get a significant number of customers in that space. So is that a lot newer changes internally. This is something we've already been doing and we feel like we've got a good number of reference customers and great level of activity in the <unk> market.
Okay.
Thank you. Our next question will come from Matt Pfau with William Blair.
Yes.
Hey, guys. Thanks for taking my questions.
And to just follow up one more question.
One key plus customers how much of the platform do those customers typically take relative to say youre more average client with around 100 employees and then it seemed like some of your recent acquisitions like blue marble and even cloud snap would be providing functionality that would.
Probably be more and more important to customers on the larger end of your market is is that sort of a deliberate motion and you continue to plan on making acquisitions to provide the functionality for that upper end of your market.
Sure.
So what I would say is the newer that our platform. The newer that we've launched a product than sometimes the more features we need to continue to add for those larger clients and so something like recruiting thats now been in the market for several years becomes naturally more competitive in that 1000, plus base learning management, something that we released probably where our latest HCM.
Product, we continue to add features over time that will become even more competitive and so you do see sometimes those 1000 plus customers say I've already got a solution for one of these components I'd like the rest of your platform I'm going to use the rest of your platform. So you are correct to think data integration becomes an important part of that element.
So maybe a little bit less.
<unk> adoption than the average sized customer, but you also get a lot more employees. So you have a lot more.
Volume and we've seen the products as we've improved them we've seen those attach rates increase over time and then I think the last part of your question was does an acquisition like blue marble target the larger clients.
I mean, it's applicable you've got customers with 100 employees that have customers in different countries, but yes. It happens more frequently as you get a little bit larger and so acquisitions like this that we think can have benefit to the entire client base can sometimes skew a little bit to the upper end of the market.
Okay, great guys I appreciate it.
Thank you. Our next question will come from Brad Reback with Stifel. Please go ahead.
Mr. <unk>. Your line is open you can go ahead with your question.
Brad I don't know if we want to hear your question somehow you are not able to kind of get through so.
<unk>.
We're riding the wave of technical difficulties here.
Alrighty.
Move on to some of the <unk> with Jefferies. Please go ahead.
Hi, great. Thank you and guys nice to see the strong results, Iowa channel My inner Brad Reback an asset.
I have been thinking of that as well.
Yes.
Tobey I think.
Yes, Doug into the operational side of moving to a larger customers, but when I think about from your perspective as CFO .
Any change or how do you think about the guidance philosophy, just given those customers may take longer to implement from book bookings to revenue.
Just obviously, there's different maybe retention dynamics.
How should we think about the revenue guidance as the upmarket progress ramps and are you going to change the philosophy anyway.
Yeah, I mean, our philosophy has been pretty consistent over time in terms of how we think about the business and how.
How we guide quarter to quarter and year to year and.
I don't see this move in particular is having an impact on our guidance philosophy around how we how we think about it provide the guidance.
Third quarter year to year as we go forward.
One of the things I would add.
Steve's description of the move up market is if you think back to how we described downmarket initiatives, two or three years ago.
What we had said was we had been seeing a lot of traction there and we adjusted the Tam from an external perspective to really just described the traction that we're seeing and I think it's very much. The same case here with the upmarket move I mean, I think we've been seeing that.
Seeing that happen successfully we've seen the traction and I think this is a reflection just externally of what we've seen so I don't think theres any significant change in terms of how we think about the operation of the business or.
How we think about the guidance philosophy aside from some of the descriptions Steve gave in terms of probably have slightly longer cycle times on sales and slightly longer cycle times on implementation, but we've been seeing that and that's what we've been seeing that and seeing the traction over time.
Great and then maybe.
If I think about.
Larger customers.
At least in some pockets of software you can have kind of a higher net return net revenue retention level right. You said you have more opportunities for cross sell and upsell any early data from the lock your larger cohorts or customers that are there.
We generate a higher NRI versus maybe your core F&B based or just any.
And that we can kind of accurate market share and could impact the model longer term.
Yes, So let me start with the last part like the impact of the model I'm not sure that two or three years from now we're going to have a meaningfully more higher percentage of clients over 1000 employees. So I think the point is we already have a fair number of customers over 1000 employees, we haven't called that out as a target market. This is not we're going to push a much higher percentage of our <unk>.
To that market space. This is this is now a meaningful enough we have been paying attention to the last three years, we've got a lot of great clients. There we should call. It out because it is naturally now part of our business and so I don't think this has any changes to the economics or the way the business operates.
But to answer your question directly you do definitely see clients that are larger in general.
You have less of an out of business right and so therefore because of the smaller out of business right you do see sometimes higher.
Both kind of net dollar retention and they have a propensity to buy more products. So if you got great products that youre, introducing youre selling back to the client base. Then is a client gets a little bit larger their needs get more complex, they're more likely to buy it so well.
We love those customers who've got a lot of them and.
We think that Theres, a great opportunity to serve even more of them overtime.
Great. Thanks, again for taking my questions and congrats on the strong results.
Thanks.
Thank you. Our next question will come from Brian Peterson with Raymond James. Please go ahead.
Hey, guys. This is Jason <unk> on for Brian Congrats on a great quarter, just one from US just on the benefiting from the great resignation.
Fiscal <unk>, how should we think about the potential benefit functions transactional form filing.
Thanks.
Yes, so just context from last year was because there was.
<unk> trend of lower employees on the platform, which was observable across the industry with all the competitive set WT revenue was down from.
From a year over year perspective last year, I think what we've what we've observed so far.
And have described a little bit is that W. Two revenue you had employees on the platform coming back over the last few quarters really leveling out this past quarter, but prior to you had employees on the platform coming back.
But I don't think we observed the same level of.
Hiring and rehiring across the client base than you might have seen in prior years, and so I think WT revenue.
Coming back versus where it was last year not sure quite quite back to what you would have seen in terms of historical levels year over year.
Yes.
Alright, thanks, guys.
Yeah.
Thank you. Our next question will come from Mark Marcon with Baird. Please go ahead.
Hey, Good afternoon, let me add my congratulations.
Is there any change in terms of the source of new clients that you are seeing just in terms of legacy regionals in house.
Any color.
Yes, Mark.
I would tell you the big traditional players as to other place we get the most customers from we definitely have had the opportunity over the last couple of years to expand into some kind of tier two type markets, where you see regional players often having a bigger presence so they probably come up a little bit as we've just naturally expanded geographies.
But I think if you look at the big players.
Some of the growth players like us in house and regional players kind of a pretty consistent story over the last several years.
Thanks, Steve.
Youre, winning relative to either the big players or some of the more modern players. What is the reason that comes up most recently at this point.
Yes, so I really think from our perspective.
We're obviously pitching to customers as we have a lot of the same module as everybody else has but we've got a much more modern view of how you should be interacting with your employees and we've got a lot of tools that will actually help you attract and retain talent. So it's not just about saving time and automating that's clearly part of the equation and important but it is really about this.
Communicating and engaging with your employees, creating a great culture, and an environment and if you do that it becomes easier to attract and retain talent and so examples of that obviously is community or video capabilities or some of the newer collaboration oriented things that we're going to be launching that message seems to really be resonating.
Versus simply a message about getting employees their data and automating, which is still important but not enough anymore.
Great and then I mean with the community and the widespread use of Cros.
Across your clients and from an employee perspective, what are you seeing in terms of changes in terms of retention rates.
Yes, so I mean, we are in.
Let me give you an update on an annual basis, we have been over 92% for really our history.
And we called out last fiscal year that we saw really record high retention rates and some of that was probably COVID-19 aided in terms of clients not moving back and forth, but we've been able to stay with very high retention rates in this fiscal year and a more normalized environment, which we feel great about.
That's great and then last question.
Obviously rates are starting to move up.
How are you thinking about this.
Investing the float balance.
And what the potential is there, particularly as you continue to grow and the average float balance continues to grow.
Yes, so I mean.
Historically, we've had a portion of the very small portion of what we hold from from client funds perspective invested outside of just overnight bank and.
We continue to look at that as the rate environment changes obviously.
To the extent that we do see rate increases come from the fed that'll be.
A tailwind for us from both a revenue and from a profitability perspective, depending on the magnitude of those rates, obviously, the magnitude of the tailwind but.
Just I think the.
First thing is to see what our rate increase looks like and then second thing is that takes a little bit of time too.
To come through to US and then Theres always discussions around how much of that we actually end up receiving so I think to the extent, we see rate hikes coming at us that will be a tailwind for us and then just a question of the magnitude and the timing.
I appreciate the color. Thanks.
Thank you. Our next question will come from Alex <unk> with Wolfe Research. Please go ahead.
Hey, guys. Thanks for taking the questions.
<unk> been asked a couple of ways, but I'm going to try a different spin on it if you think about all the tailwind and headwinds in the business right now.
Whether it's the great resignation more employees, leaving for different jobs are harder to hire talent.
Also a kind of normalization of the movements between vendors.
In your marketplace being a potential tailwind if you look at the tailwind headwind dynamic.
How would you classify that.
The demand environment kind of post COVID-19 versus what you thought it would be I'm, saying post COVID-19 .
First color but.
Correct, it's a sensor that I'm curious.
So that's a good question, it's always hard to figure out when you're in the moment as well.
So things that we look at the sales level of activity the number of presentations the conversations that we see there.
Broker channel referral activity that we're seeing in overall, what's happening in the market that feels very similar to pre COVID-19 level of activities has taken a while to get back to that but if you net it all out it feels like we're in a more normalized environment.
There was one.
Positive I think from I don't know if its really a tailwind, but I certainly raise the level of importance of these conversations is if you ask Ceos of our customers with one of your top challenges, they're going to tell you people and it's attracting and retaining talent I am not sure every single one of those customers would answer that question. The same way three or four years ago, and so one of the things because of the great resignation and the movement that is.
On a remote work and all of these trends in Gen Z entering the.
Workforce, it's a challenging environment to be an HR professional and to make sure that you've got all the tools that allow you to drive the initiatives to attract and retain talent that has become a more important part of the conversation.
We saw a few years ago, and we think that our modern workforce strategy aligns really well to those challenges.
Perfect. Steve. So I guess then the question for you would be if I look at the guidance and I think some odd assets I'm going to try it a different way.
Look <unk> beaten your guidance by the most.
Never beaten by the last two quarters and the raise for the year from a percentage basis and a <unk>.
<unk> is also larger than I've ever seen it in our <unk>. So is it something that's surprising you did you have you changed to be more conservative and kind of the methodology just why what is leading to this larger variance.
Dynamic, which is great by the way not sure you should change it but I'm just curious.
What's driving that.
Well I think you've just got to ground in.
Some of the moving pieces that we've had there that are still providing impact to the business. So I think you used the phrase sort of post COVID-19 , maybe where maybe we're not but the recency of being in the depths of that we're seeing tailwind from.
I think easy comps over these last two quarters and so you've seen you've also seen employees on the platform coming back.
And I think there's nothing that's changed about our guidance philosophy I think we've taken the same philosophy, you've just got.
I guess the question that you asked Steve you've got headwinds and tailwind that we've been estimating sort of best you can with a consistent philosophy and consistent sort of method of estimating I think you get through some of those and you start to get into next fiscal year and I think one would hope that you have a more normalized environment, but I think this fiscal year will we.
We're still living in an environment, where the puts and takes of COVID-19 over the last 24 months.
You don't have a perfect crystal ball and your ability to estimate I think to some of the earlier questions though.
The things that we are seeing are.
The demand environment, returning to a pre COVID-19 level, we're seeing employers on the platform returned to a pre COVID-19 level, we're seeing the levels of sales force productivity returned to pre COVID-19 levels and so I think overall when we came into the pandemic. What we had said was we were going to try and drive things.
Such that when we came out of the pandemic, we'd returned to the same level of momentum that we were seeing coming into it and.
I think we're starting to see that come through.
Perfect and I guess, maybe just to sneak in one one final one if I think about employment trends in general I think before you had talked about how you thought about employment trends being a general tailwind in terms of revenue growth for the year with respect to what youre seeing out of the current employment.
Reports trends and even the data out of your own system is there any updated thoughts to how to think about employment trends both for this year, but even maybe a longer term given what we're seeing in the market.
Yes, so I would say.
Prior to this pandemic and obviously huge cycles that we've gone through it was actually reasonably predictable. So what you would see is if you've got a growth GDP environment and obviously, we're in kind of a lower growth environment for a lot of years. So if you see GDP growing at a couple percentage points or two or three percentage points employees on the platform would grow something less than that it would grow a little.
It will provide a little bit of tailwind and then I've lived through a couple of recessions in this business myself as well and you typically would see the employees on the platform do the same thing the other way, which is you would then start to see them decline, but it would stay we'd never be right on GDP, but it would be a little bit less than GDP on both sides of the equation much harder to predict right now I mean, thats the reality of it and I think that.
Part of what Tobi said before which is predicting employees on the platform has been more challenging.
I have to think that over time, it probably returns to a similar dynamic when we get to kind of less.
<unk> ability in those numbers, but that's the way we try to plan. It we try to be conservative in terms of what we're seeing today not planned for increases into the future and then but I don't think Theres a lot left in that tank anyways. So we feel like we've gotten a lot of that benefit over the last probably.
Certainly for quarters.
Perfect Congratulations guys just another awesome quarter.
Sure.
Thank you. Our next question will come from Daniel Jester with BMO capital markets.
Great. Thanks for taking my question.
I mean I wanted to go back to the modern workforce absolute you talked about a couple of times so far.
I guess just driving that engagement is that clients that have joined in the last year and change or is that seeing youre seeing that kind of more broadly across the whole platform.
Maybe to expand on that are you doing anything different to push those back into the base relative to other products you released.
Yes, it's a good question.
Right now, we're seeing it being driven by both and so the newer clients because they are going through the sales process and they are feeling this pressure in the marketplace and they are looking at our solution. They definitely want to leverage these types of tools and they are more active in terms of getting on.
Set up with with community launching announcements using things like video and then just getting engage with their employees earlier in the implementation cycle. So we definitely see January starts actually using community in January which if you go back a couple years ago, we didn't see as much of that occurring now theres a lot more features in there. So that's certainly part of the equation the other thing.
Is we've definitely taken this kind of best practice approach back to our customers and said to them listen we've got some ideas in terms of how you can engage with your employees differently. We do that a lot through this modern workforce index, which allows us to score customers in the same industry based off how engaged they are employees are and we actually tell them, how they're doing versus the customers.
Who are retaining employees and growing faster than them and then we have a recommendation engine with machine learning technology behind that that is surfacing. The recommendations that we think can move the needle and so that is a relatively new feature that we've added and so we've been driving activity levels over the last six months higher activity levels in.
<unk> and I think that's probably been one of the bigger contributors in seeing our existing clients use more community features or even use things like surveys and learning.
Okay. That's helpful. Thank you and then Tobey I'm, sorry, if I missed this.
Could you call out how much blue marble added revenue in the quarter.
We didn't.
I think.
We had initially characterize that is less than <unk>.
2% of overall revenue for the year end.
So that was the characterization we provided.
Okay and performance in the quarter was consistent with that yes.
Yes.
Okay, great. Thank you very much.
Thank you.
Thank you. Our next question will come from Robert <unk> with D. A Davidson. Please go ahead.
Alright, thanks for taking the questions.
Can you talk about what youre seeing in terms of wage wage inflation goes in terms of customers potentially boosting your float balances in the revenue line and then also for your own hires generally impacting margins.
The question didn't come through clearly I think I heard the first part was was around what's driving I think float balances and so we did we.
We saw about $1 8 billion and average daily balance in the quarter, we had provided the guidance of.
Being around $2 2 billion for Q3, and I think typically what you see is the Q3 flow balances higher.
And I think in terms of quarterly sequential quarter to quarter change pretty pretty much in line with what we would've seen in other years and nothing different from a seasonality perspective.
Alright.
That was best attempt at what we heard come through on the question.
I'm, sorry, I was actually asking.
Asking you about it because of wage inflation that is posted on the slow and then also on your own margins.
Oh, yes, so I think wage inflation doesn't have a big impact to our business realistically because it can ultimately allow us to have a little bit more float.
It happens more on the tax side, there is some float and direct deposit, but then that the wage inflation then translates to a smaller percentage of taxes that you hold for a period of time and then obviously with rates where they are right now it doesn't have a very meaningful impact to our business now as rates increase that starts to be more material, but still in the big scheme of things it's relatively small.
Sure.
Got it.
How would you characterize the competitive field of market above 1000 versus the lower end of your range of an earlier range.
But I think.
From a competitive set perspective.
Depending on how high you go you may see a slightly different competitive set but I think we would have described the.
The competitive dynamics sort of in that 1000 employee market as usual suspects you might see in other.
The deals you might see ADP, you might see you kg or formerly ultimate there you go a little higher you might see somebody like a ceridian and I think those are <unk> would be there I mean I think those are the names that you would see most frequently at sort of the upper end of our market. As we would have described it previously around 1000 employees and I think generally speaking.
Same competitive dynamics that I, just described and that 1000 to 5000.
Got it great. Thank you very much.
Okay.
Thank you. Our next question will come from city Panic Huang with Mizuho. Please go ahead.
Thanks for taking my question most of my question.
Just want to ask about this cloud snap acquisition I understand the need for the data integration side, but wondering what's the.
Now behind that data indication to be owned by HR Department.
Yes that would be helpful. Yes.
Yes, so I would put this into.
Our category of this could really accelerate our strategy that we already have from a data integration perspective, so our clients come to us today and they ask us to integrate with a wide variety of systems. Some of those systems actually power our broker referral channels. So they can be benefit systems. They can be 401, K systems other times its financial systems like getting the general ledger data back.
<unk> two.
Their GL system, so on and so forth. So we have hundreds and hundreds of integration partners that we integrate with today with cloud and that really does it really take more of a low code automated approach towards these integrations and so we can imagine that leveraging their capabilities to provide a much more modern experience clearly API driven real.
Time.
And then the whole configuration time, when youre using their tools can shrink dramatically and the transparency that we can give the customers. So I wouldn't think about it as like a different business segment that we're going to go after but technology that can kind of power our existing integration strategy and and have an impact to the type of value that were offering both our customers and our <unk>.
Partners.
Thanks for that color.
Okay.
Thank you. Our next question will come from Arvind <unk> with Piper Sandler. Please go ahead.
Yeah.
Hi, Thanks for taking my question.
Couple of quick ones.
Yes.
From a competitive dynamic perspective, do you run into.
Takeaway business from some of the legacy deal providers are you, mostly taking business away from the legacy.
So payroll providers.
Yes, so the PEO market isn't one that we compete with a lot. It does happen I think that would be a very small percentage you typically CPO as being the most popular as customers are kind of in that growth stage, and so $20 $30 40 employees, they're clearly clients that use the PEO that are larger and smaller than that but thats at least where we.
See it most commonly and so sometimes somebody might be exiting a PEO and coming onto our platform you might have somebody who might go the other way, but that's a small number.
That would move from us to a PEO and it's a small amount of our percentage of new sales. So it wouldn't necessarily see them as a competitor that we run into very frequently.
Great Great and then.
Good day, everyone me the math on.
Kind of float revenue.
I have to go up I know youll have collateral Steven alright, so a more meaningful but.
Should we think of like every 25 bps.
Interest rate backing out your margins.
Yes so.
I think the backdrop is now we've seen.
We called this out from a from a guidance perspective to between 5% to 10% basis point expectation in a quarter.
Yield.
I think.
Don't know, what we might see from the fed but I think you can you can do the math on say for example, 25 basis point raise on $2 $2 million I think the only the only sort of practical element of that is we don't always get in fact, we don't get all of that 25 basis points and we don't get it immediately so it depends on I mean, we have.
<unk>.
10, plus banking partners that we work very closely with and it's a conversation with each of them around the timing and the amount of that 25 basis points that we would get but.
That's how that practically work. So you are talking about well how much do you get and then over what time does that flow in I think typically.
You would get at least half of that but it varies by bank in and the timing does as well.
Okay perfect. Thank you very much.
Thank you ladies and gentlemen, thank you for participating in today's question and answer session I would now like to turn the call back over to management for any closing remarks.
Thank you very much everybody I appreciate your patience as we worked our way through some technical difficulties I'm glad we were able to get to everyone's questions just want to wrap up with thanking all of our <unk> team, who has really been working hard through a really busy year and managing all of the changes that have hit us whether it's the legislation that we've dealt with or obviously omicron and everyone.
Working from home just a great job by our team. So hope everyone has a great night. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now too.
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