Q2 2023 Paylocity Holding Corp Earnings Call
Hello, and thank you for standing by welcome to play Lofty holding Corporation second quarter 2023 fiscal year results.
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I would now like to hand, the conference over to your Speaker Ryan Glenn you may begin Sir.
Yes.
Yeah.
Good afternoon, and welcome to pay losses earnings results call for the second quarter of fiscal 'twenty, three which ended on December 31 2022.
Brian Glenn Chief Financial Officer, and joining me on the call today are Steve Beauchamp, and Toby Williams co Ceos Pelosity today, we will be discussing the results announced in our press release issued after market closed a.
A webcast replay of this call will be available for 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 private information.
Subject to risks and uncertainties that could cause actual results to differ materially from those projected in the forward looking statements.
For additional information please refer to our filings with the Securities 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 that philosophy dot com under the.
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 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 and.
In regard to upcoming conference schedule I will be attending the Stifel Executive Summit in Florida on March six and the Raymond James Institutional Investor Conference in Orlando on March 7th and Toby will be attending the JMP Tech conference in San Francisco also on March 7th. Please let me know if you'd like to schedule time with us at any of these events with that let me turn the <unk>.
Over to Steve.
Thank you Ryan and thanks to all of you for joining us on our second quarter fiscal 23 earnings call, our differentiated value proposition of providing the most modern software in the industry coupled with continued strong execution resulted in excellent Q2 results and increased full year guidance total revenue was $273 million or 39 three.
Rent growth over Q2 of last year and exceeded the top end of our guidance by $12 million.
Our continued strong sales momentum is the result of ongoing investments in product innovation, including leveraging last year's acquisition of cloud snap a flexible low code solution for integrating disparate business applications, we have fully integrated cloud snap into the Pelosity suite and are leveraging this technology to provide the most modern software in the.
To accelerate the rollout of new integrations and use cases to better serve our clients and their employees.
To date, we had about nearly two dozen nextgen integrations across ERP point of sale time, and labor and expense related software that allow our clients to experience better data consistency by sharing employee benefits financial and other key data elements more readily across their HR and other critical business systems.
In addition, cloud snaps low code integration capabilities has accelerated the extensibility of the Pelosity platform, helping to drive differentiation and incremental value to clients by positioning employee data and the <unk> platform at the center of their application ecosystem.
We continue to see strong attach rates in our modern workforce solutions as clients realize the value in creating a unique employee experience and engaging culture for remote hybrid and in office teams community and premium video, whose new features centered on creating and sharing files automating Keane groups are centralizing video manager.
Have allowed our clients and their employees to use our application in ways that stretch beyond traditional HCM functionality.
This dynamic is reflected in our utilization metrics, where community monthly active users post and announcements continue to demonstrate strong growth on a year over year basis. Similarly, the number of video is created and played within our premium video offerings continue to grow faster than the overall business as clients look to increasingly connect and engaged.
With their employees through mediums that are more engaging than traditional E mail.
Our continued success in the market and commitment to product innovation continues to be recognized by third parties. As Pelosity was recently named an overall leader in all 12 product categories in <unk> Winter 2023 grid report, including the number one overall leader in several categories.
Core HR HR management systems performance management, and learning management. Similarly, the strong culture at Pelosity continues to be recognized externally as we received a 2023 built in best places to work Award.
I would now like to pass the call to Toby to provide further color on the quarter.
Thanks, Steve our focus on driving higher employee engagement collaboration and connections once again contributed to strong results in Q2.
Underlying tenets of our modern workforce solutions have continued to drive increasing utilization of these products as we exit the pandemic.
This dynamic was evident in Q2 across a wide range of clients, including an auto dealer with 200 employees across 22 locations that has seen employee survey participation increased to more than 70% since the rollout of Pelosity surveys, which directly led to updates in their fringe benefit policies and higher employee engagement.
Similarly in outdoor furniture manufacturer with over 800 employees has seen over 90% of its employees engage with Pelosity mobile app to communicate collaborate and recognize their peers.
Combined with the ongoing investments, we're making across our broader product suite. This commitment to innovating and building. The most modern software platform in the industry contributed to strong sales execution in Q2 and helped set us up for a strong second half of fiscal 'twenty three.
Consistent with the prior quarter interest income on client funds continues to rise as a result of sustained interest rate increases from the federal reserve.
Given the large market opportunity in front of US we continued reinvesting a portion of this upside back into key areas of the business to help drive future growth in.
In addition to continuing our investments in digital marketing and our channel initiatives, which once again delivered more than 25% of our new business. In Q2, we will continue to incrementally invest across our product suite to further innovate and deliver the most modern software platform in the industry.
This is also a very busy time of year for our operations teams as they work closely with clients on year end processing of payrolls W. Twos, $10 95, and annual tax form filings to federal state and local agencies and the implementation of new clients.
Want to thank all of our employees for their hard work and dedication to our clients. During this very very busy time of year I'd now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 'twenty three guidance.
Thanks, Tobey total revenue for the second quarter with $273 million, an increase of 39, 3% with recurring and other revenues up 31, 4% from the same period last year and $14 million ahead of our guidance midpoint alright.
Our adjusted gross profit was 72, 4% for Q2 versus 68, 7% in Q2 of last fiscal representing 370 basis points of leverage as we continue to focus on scaling our operational costs, while maintaining industry leading service levels.
We continue to make significant investments in research and development and to understand our overall investment in R&D 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 38, 4% when compared to the second quarter of fiscal 'twenty, two and we remain focused on making incremental investments in R&D.
'twenty three as we continue to build out the payoffs the platform to serve the needs of the modern workforce and.
In regards to our go to market activities on a non-GAAP basis sales and marketing expenses were 23, 7% of revenue in the second quarter and we remain focused on making incremental investments in this area of the business in fiscal 'twenty three to drive continued growth.
On a non-GAAP basis G&A costs were 11, 3% of revenue in the second quarter versus 13, 3% in the same period last year and we remain focused on consistently leveraging our G&A expenses on an annual basis.
Our adjusted EBITDA for the second quarter was $77 4 million or 28, 3% margin and exceeded the top end of our guidance by $10 9 million and represented 450 basis points of leverage versus Q2 of fiscal 'twenty two.
We continue to be pleased by our ability to drive increased profitability through leverage and adjusted gross margin adjusted EBITDA and free cash flow, while also maintaining strong revenue growth.
Briefly covering our GAAP results for Q2 gross profit was $182 9 million operating income was $18 2 million and net income was $15 6 million.
In regards to the balance sheet, we ended the quarter with cash and cash equivalents of $120 1 million and no debt outstanding.
In regard to client held funds and interest income our average daily balance of client funds was $2 3 billion. In Q2, we are estimating the average daily balance will be approximately $2 7 billion in Q3 with an average annual yield of approximately 320 basis points.
Full year basis, we are estimating the average daily balance will be $2 4 billion with an average yield of approximately 280 basis points. Additionally.
Additionally, please note that our guidance includes the impact of this weeks 25 basis point interest rate increase and also assumes an increase of up to 25 basis points in March.
In regards to client workforce levels. The number of client employees on the platform was flat in October November December and January on a sequential basis in each month and as a reminder was up only modestly on a sequential basis in Q1.
Our guidance assumes client workforce levels to be flat for the remainder of the fiscal year.
Finally, I'd like to provide our financial guidance for Q3 and full fiscal 'twenty, three which assumes no further changes in client workforce levels in the back half of this fiscal year.
For the third quarter of fiscal 23 total revenue is expected to be in the range of $330 5 million to $334 5 million or approximately 35% growth over third quarter of fiscal 'twenty to total revenue and.
And adjusted EBITDA is expected to be in the range of $121 5 million to $124 5 million.
And for fiscal year 'twenty three total revenue is expected to be in the range of 1.1, $5 6 billion to $1 106, 1 billion or approximately 36% growth over fiscal 'twenty two.
And adjusted EBITDA is expected to be in the range of $358 5 million to $362 5 million, which represents 320 basis points of leverage over fiscal 'twenty two.
In conclusion, we're pleased with our Q2 results and the strong momentum we are carrying into the back half of fiscal 'twenty three.
With our fiscal 'twenty three guidance of approximately 36% revenue growth at the midpoint and adjusted EBIT margins of 31%. We are firmly above the rule of 60 in fiscal 'twenty three.
We remain committed to continuing our history of driving profitable revenue growth. While also increasing adjusted gross margin adjusted EBITDA and free cash flow on an annual basis.
Operator, we're now ready for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question you will need to press star one on your telephone and wait for your name to be announced.
So withdraw your question press Star one again please.
Please standby, while we compile the Q&A roster.
Our first question comes from the line of Scott Berg with Needham <unk> Company. Your line is open.
Hi, Steve Toby and Ryan Congrats on a good quarter and thanks for taking my question.
I've got two here.
We're seeing a little bit of weakness from some other SMB companies are software vendors.
Focus downmarket, a little bit any color in terms of what youre seeing around customer adds in the last quarter, maybe relative to your expectations.
Year to date.
Yes sure Scott.
So we had a really good first half of the year overall and I think even took we mentioned.
Talking about some of the sales momentum that we've had in our busy selling season.
That allowed us to significantly raise the year I think we have an advantage being the HCM business.
Payroll is something that every single company has to do for US It all starts with payroll and using the data from doing payroll to be able to connect to the rest of the suite and obviously you sell a much broader solution today and so we've had the continued success in.
They're adding new units and we've also had success in terms of selling more product and also even more success up market as we kind of called out over the last couple of calls.
Yeah.
Got it helpful. And then for my follow up question I know Ryan you mentioned that your R&D expenses up.
38% year over year, that's faster than your revenue growth right now.
Called out many times that I think your product innovation is driving your at least what I think are supersede one rate commitments over the last two years for the company, but how should we think about R&D investments going forward do you continue to step on the accelerator is similar.
Similar manner as you have been recently or is that an opportunity that maybe gained some financial leverage over.
Because you are starting to get hit as much product is unique.
Yes, I think Scott our Formula has always been a combination of adding new units landing those customers and then expanding the number of products that we've got I think we've been fairly consistent.
Most of our revenue growth in terms of our investments in product and technology, we never viewed that as a big leverage point, we'd look for leverage elsewhere, we see big opportunities to add more modern capabilities. This week additional products and revenue opportunity for this week.
We certainly have not signaled any intention to be looking for leverage there. We think there is a fair amount of natural leverage in the business model.
In many other places as we scale.
So I think the same approaches we've taken historically.
Great Thats all I have thanks for taking my questions.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of.
Brad Reback with Stifel. Your line is open.
Great. Thanks very much.
Steve as you talked about sort of customers using the product and new use cases is there an opportunity for new ways to monetize going forward beyond just per employee per month.
Yes, I think Thats a great question, Brad we called out the cloud snap acquisition and the ability for us to integrate in our marketplace. We really view the data that we have about people to be really valuable to our customers. Both from an automation perspective, but as we integrate with their broader suite of software that they are using to run their business there certainly could.
Be additional monetization opportunities.
Seeing that a little bit in marketplace.
Very early stages of continuing to expand the number of providers and leveraging the data that we have so I don't think that.
All of our revenue has to be TTM I think most of our revenue will continue to be ppm, but theres some opportunity for us to be able to leverage marketplace to potentially drive some.
Referral revenue back to philosophy as well.
That's great and then one quick follow up I know, it's still really early and sort of the adoption curve across a lot of these newer products.
But do you have any appreciable data yet on higher retention rates for customers that are consuming more of these non traditional HCM products.
Yes, I would say that higher utilization both in terms of number of products that they use and then how much frequency their employees are logging in does translate to a higher retention.
It is a small difference quite frankly, there's a lot that goes into retention rate. The service elements are really important.
As well, but overall, we have historically segmented the customers based on utilization and number of products and we've seen the customers who take advantage of the broader suite staying with us a little bit longer.
Perfect. Thanks very much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Bryan Bergin with Cowen Your line is open.
Hi, This is actually Gary Levine on for Bryan in terms of the demand environment is there any change in <unk> through January in terms of the pace of prospective client decision, making.
Yes, I can start with that and see if anyone else wants to add color. I think we were really happy with our sales results for the first half of the year and into our very busy January selling season. That's obviously, what the allowed us to be able to raise the year.
Both top of funnel activity in the larger end of the market, our core marketplace and even down market has been pretty strong.
Definitely are seeing the modern suite the newer capabilities that video products community survey LMS, all really resonating even in a post COVID-19 environment, where our clients are dealing with hybrid workforces. They are dealing with the demand more flexibility Gen. Z continues to grow in the marketplace and so we would certainly credit to the comp.
The nation of service and differentiated product as to our success that we've had so far.
Okay, Great and then in terms of your client conversations.
Roy the payback period for your offerings to increasingly become a focus with prospective client conversations and how do you generally view the typical payback period with the average client.
Yes, I think so maybe a couple of different points on this I mean, theres no doubt that with the type of product the type of software that we're offering in the market. There is an appreciable ROI that comes from.
Both modernization and automating what would otherwise be manual tasks for folks I think though the core of the value prop that we're really focused on from a from a client or from a prospect pitch standpoint is really around the breadth of the platform focusing on the fact that we do have the most modern platform the industry and talking to.
People about what we can deliver from a value proposition standpoint that is certainly with the core payroll certainly with the core of the HCM suite, but really getting getting into all the things that we're offering that really go beyond the traditional HCM suite, whether that's things like community or what we're doing with the modern workforce index as we've continued to expand the product set with things like.
Community plus what we're doing with video surveys and LMS really getting towards engaging with employees and giving clients the ability to engage with their employees.
On a more modern and differentiated way. So I think that's really the core beyond an ROI conversation of how we're having those types of client or prospect conversations in the market.
Great. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Terry Tillman with Truest. Your line is open.
Yes, thanks for taking my questions as well.
Question, then a follow up and dangerously I guess, Mike <unk>.
Creative juices are flowing.
You all to help the idea of a modern platform and clearly payroll core HR and talent management, you've got a lot of those capabilities to keep adding more R&D, but what I'm curious about is ive been hearing software companies talk for a number of quarters now about this aspirational goal of vendor consolidation and that will benefit their business. So whether it's the premium video community surveys LMS or just <unk>.
Management bundles.
I'm not suggesting you are going to shift from trying to go after new logos, but is there an incremental opportunity to almost have kind of a tactical selling effort back to the base to really drive kind of a vendor consolidation playbook.
Hey, Terry Yes, so I mean.
Ed.
The main part of our motion from a go to market perspective has certainly been in terms of landing new units no doubt about that and I think what we're seeing as we do that is new clients onto the platform have tended to take a broader part of the suite.
Which we feel good about I think though to your question. We have also had a distinct motion going back into the customer base as we've expanded the product set going from $200 for the full product set at the time of the IPO to where we sit over $400 today.
440, I mean, we have an opportunity to sell product back into the customer base and we do have a dedicated team that does that so I think what you've seen from US is over the course of the last three or four years primarily.
Set up and I think invest more in that back to base motion and I think we've seen a reasonable amount of success with that.
Okay. It sounds like Thats still going to be secondary maybe more opportunistic, but but that may be a future call option.
Well I think just given the relatively low share of a relatively large market that we have I think we have put the bulk of our of our go to market motion in terms of landing new logos and new units and I think that just reflects the size of the opportunity that's out there in front of us.
Yep Yep it sounds good and I guess the follow up question is up on the upmarket I always like hearing examples the auto dealership and then the furniture manufacturer <unk>.
We'll continue to iterate on your platform and you have more capabilities, whether it's a thousand employees plus or do you feel like you can keep getting toward higher up in the market or what we could share a little bit strategically how you think about that kind of upmarket opportunity over the next two to three years. Thank you yes sure. It's a good question, we've always focused on as we build new.
Products, we build the capabilities that we think our average sized customer of a little more than 100 employees with real needs and then what happened is as we get more customers, we see more demand from our customers and we really kind of live in product and technology on the idea of customer as a co creator.
Quest features and we continue to enhance the product and keep teams in an agile fashion constantly building on top of that product and the product gets richer in terms of the feature set and that starts to appeal to larger customers and so what you've seen over time is that.
<unk> modules have matured as we've added some of these newer modern capability, we are starting to see differentiation even upmarket.
They are starting to think about how do they engage employees and going beyond automation.
No. We don't think that that goes to the moon quite frankly, we just increase the target market about a year ago or so and we're having success in that marketplace. So it's possible that stretches a little bit over time, but I would be more focus on with Toby just said, which is we've got a really big opportunity in the market that we're in very.
Very low market share and so we plan on focusing on capturing as many customers in our existing target market as possible.
Got it thank you.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Mark Mccollum with Baird. Your line is open.
Hey, good afternoon, congratulations on a strong quarter.
Steve Tobey, you've talked a little bit about cloud snap.
Paired remarks in the press release can you add a little bit more dimensionality with regards to how thats, helping in terms of getting new clients.
What are you seeing from a sales productivity perspective, and what are some of the integrations that are the most common that you are seeing that you werent able to do before that you can do now and Thats really adding.
The sales momentum sure.
So mark we've had kind of a marketplace, where our clients can connect disparate applications to the employee data that we have.
And certainly we can do that in a real time fashion from an API perspective, and we do that with some of our larger providers that get asked more frequently on the flip side. You've also got customers, who may have vertical market applications or whose applications.
May not be quite ready for real time API capabilities.
And then it takes a while to build those integrations and we've got a team of technical services team. That's been doing this for years clouds that really enables that to operate so much faster using the low code capabilities that they bring to the table and so we can bigger integrations, so much faster and they also become much more scalable on a go forward basis using <unk>.
That technology and so for us it really opens up the landscape of number of providers that we can integrate with and it also.
It gives us increased speed to market for those integration and longer term scalability.
Great.
Does that help you more in the upmarket or.
Or the mid market or how would you describe that.
All the way across certainly upmarket clients are definitely demanding integration into their disparate systems, but even.
If you've got 35 employees you'd love that connection into your accounting system as well and so the scalability portion really helps down market in terms of must be able to scale that to a broader set of customers upmarket, we may spine vertical market applications that don't necessarily have horizontal.
Penetration across all of our markets using cloud snap, we can get those vertical market applications ERP integrations up relatively quickly as well. So I think it is really helpful across the entire target market.
And so are the ERP integration is the most common that you are seeing now or what would be the most common.
Yes, so I think broadly speaking ERP applications.
It would be one of the most common areas and certainly the accounting portion of that is a key integration, but if you think about it employee data ends up being kind of at the center of many workflows and processes at an organization. So we know when people are hired when the term they know in their supervisor changes.
We know a lot of information about the employee that from a workflow perspective, you can power into other applications and create even more automation for clients. So although we're seeing a fair amount of demand and ERP point of sale systems is another great example, vertical market applications. Another Great example.
And so we're seeing a fair amount of demand and we're excited about being able to fill that demand with cloud capabilities.
Okay, Great and then my follow up is just on the on the float.
The effective yield you didn't give the effective yield for the second quarter I'm, assuming it's somewhere around 290 basis points is that right and can you can you remind us.
During the first quarter in terms of the sequential increase.
<unk>.
You did give us the float expectations, so that sort of a third quarter I'm just wondering to what extent.
Seems a little on the conservative side.
Sure Marc I can take that one so first quarter average daily balance was about $2 1 billion and the annual yield was one 5% or 150 basis points second quarter, you had it right about 290 basis points of yield. So you saw that big step up following the September and November fed rate increases.
Third quarter as we outlined in our prepared remarks.
$2 7 billion dollar client fund balance average there 320 basis points of annual yield and I think if you do the math on the fourth quarter, we're expecting about $2 6 billion of client funds in the fourth quarter with about three four to three 5% annual yield.
That's very helpful. Thank you so much sir.
Thank you.
Please standby for our next question.
Our next question comes from the line of Matt <unk> with Jefferies. Your line is open.
Hi, good evening, thanks for taking my questions.
First one just around the numbers themselves if I think about the <unk> guidance. It kind of gives us an early peek into FY <unk>.
The world is changing right underneath our feet at all times that it implies kind of a low twenty's recurring revenue growth rate you guys have been growing well above that.
We're big fans and Theres been a lot of momentum behind the business I'm, just kind of thinking should we expect growth to.
Is that a conservative because of macro or is that just the <unk>.
Comps getting tougher or is that just.
How should we think about that especially in the context of where the business momentum has been and where it was prior to COVID-19.
Hey, Scott.
So I guess the way I would think about this is if you go back to.
The fiscal year prior to Covid, we were in that sort of mid Twenty's ish.
<unk> range from it from a recurring revenue growth perspective, and at that point in time, we were guiding.
In the low Twenty's and I don't think our guidance philosophy has changed from then until now and what we had talked about at that point in time was was continuing to operate the business and drive the business and invest in the business to be able to come out the other side of everything that was pandemic related.
With a similar growth profile and I think that's what we've talked about over the course of the last handful of quarters is as you start to get clear of some of the noise in the comps, which we thought would be the back half of this fiscal year and in particular Q4, you would start to see more normalized growth rates that probably start to look a lot like they did pre COVID-19.
Certainly on a much bigger business, but.
And I think that's what we're that's what we're starting to see I mean, if you if you sort of unpack some of the dynamics there Ryan called out that we are seeing really flat performance from an employers on the platform perspective, we have continued so what that has been a tailwind.
Starting to comp some of those increases and so that starts to flatten out.
I think you also from a demand perspective.
Steve made some of these comments you we have continued to see.
A reasonably strong demand environment the sales execution has been good.
Which we feel good about I don't think youre seeing any.
I don't think we're any displaying any particular conservatism as it relates to the macro we're certainly aware of the macro concerns but from a performance perspective have continued to see a strong demand environment I think youre, just starting to see us normalizing in Q4 back to pre pandemic level of growth rates as.
As we get through some of the noise that was in the comps, which is pretty consistent with how we've talked about things over the last handful of quarters.
Great and then maybe a follow up for Steve.
As I just think about it.
The company's evolution.
Some of the questions you've gotten before this are you getting.
But.
Obviously your primary advocates cannot be the HR department, but are you getting more in different buyers inside the organization is that giving you access to maybe more dollars or budget that may not have been previously thought of going through that.
Or that they are able to allocate to you how should we think about that.
Interesting question I think the buyers for the most part have stayed very much the same meaning it's typically your head of HR and also your CFO as part of that decision, making process. Historically, we would involve Ceos at times, but it would probably be more from an approval perspective I would tell you that we've had.
Better CEO conversations when we start talking about how you engage employees that you drive retention, how you're driving productivity and employees with things like LMS, how youre gathering feedback and making changes based on that feedback for this engagement concept really does appeal to a CEO . You think people are the most important asset at any company and so the ability to onboard.
New employees to drive productivity to make sure that retention is high to attract talent I think we definitely although the HR and CFO Bae are still the key buyers I think we've extended the value proposition such that we've got more conversations and access to the actual CEO .
Great. Thanks, again for taking my questions.
Thank you.
Please standby for our next question.
Our next question comes from the line of Brian Peterson with Raymond James Your line is open.
This is Alex sklar on for Brian .
The current quarter's currently there's normally a big hiring quarter just wanted to see if theres any change at the margin to your hiring plans relative to what you had laid out the last couple of quarters.
Yes, I would say, it's a little bit different by department.
But if you think of sales, it's really post year end. So as we start to hit the spring timeframe. So this month in February and March that things really ramp up when we start to put our planning process for next fiscal year and start ramping up sales head count. So we're fairly early in that we sometimes get off to a little bit of a head start when we can and we always do that opportunistically, but.
The Iraqis is really ahead of us I think a really good success from a product and technology perspective, great retention in that group you can see.
Had pretty good year over year increase in investments there. We're excited about the pipeline for that organization and we went into the year and really fully staff just from an operations perspective, because it's a really important time of year to be there for our customers and to be able to deliver the service that they need.
So overall, we feel really good about the staffing levels and employee value proposition that we're selling in the market a growth company.
In the software space.
Im not looking to reduce expenses, but looking to develop talent and promote people and continue to grow really resonate. So we've been really happy with our ability to attract and retain talent.
Okay.
Okay, that's great color and I also wanted to follow up on Terry's upmarket question earlier. So I'm curious can you help frame kind of the percentage of your pipeline I don't know if either in terms of MLR you have a different preferred metric, but that's coming from those upmarket opportunities now versus a year ago.
<unk> annual recurring revenue, we don't necessarily break that apart by any specific segment, but if you think of our historically are.
30, 40 employees to 500 employees, that's where we still get the majority of our new recurring revenue.
The larger end of the market certainly is growing really nicely, we called that out really over the last several quarters that continues to be success.
And we continue to get traction down market as customers are starting to look for those new capabilities.
So think about the majority of our revenue is still coming from the core market that we focused on really from the beginning.
Alright, great. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Matt Pfau with William Blair. Your line is open.
Okay, great. Thanks for taking my question just just one wanted to ask on the employee growth within your customer base and the comments that that was flat and expect it to be flat.
Thing to read into that in terms of the health of your customer base or is this just sort of a more of a return to what you would see in a normal labor environment. Thanks.
Sure Matt I can take that one I think if you think about the guidance philosophy, we've had all the way back to the start of the pandemic, obviously theres been a lot of uncertainty over that period of time and I think the approach that we've taken as we've guided to what's in front of us and we've done that here again this quarter.
I outlined in the prepared remarks workforce levels have effectively been flat since August and up modestly in July and that's our expectation for the balance of the fiscal year to the extent things get a little bit tighter or we see some expansion. The other way I think that sort of the movement within the guidance range, but sitting here today coming off of a really strong selling seats.
And in a great January I think we feel good about where.
The overall revenue guidance sits and obviously watching the macro closely but have not seen any impact within the client base and likewise from a sales perspective continue to feel really good about the demand environment.
Great helpful. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Daniel Jester with BMO. Your line is open.
Hey, great. Thanks for taking my question.
Yes, My guess is that at this point Blue Marvell is probably pretty well integrated into the platform you've got cloud snap now out there I guess.
It frees up potentially some bandwidth internally for inorganic growth opportunities. So Steve Tobey would love to hear how you're thinking about inorganic in the year ahead.
Hey, Dan, Yes, I mean, I think just in terms of those two I think the press release that we put out certainly feel really good about what we're doing with cloud snap Steve made some comments earlier just around what the capabilities that thats, giving us from an integration platform perspective, and so really happy with how that's worked out and the value that's been able to add still in the process.
I think Steve made the comments on the last quarter call.
We're still in the process of fully integrating the blue marble capabilities into the platform and I think thats typical of how we would sort of approach any acquisition that we do the processes that we bring something in and then we'll then spend the time, which could take anywhere between 12 months to 24 months to fully baked capabilities into our platform in a seamless way from a.
A user experience perspective from a data flow perspective, and so the teams are still working on that and feel good about the progress so far.
Certainly we continue to have the overall bandwidth to look at acquisitions that might be interesting I think our point of view historically remains the case today, we would prefer to always develop the next capability that we want to push out from a product perspective, but I think we've also taken advantage of in certain instances the ability to access.
<unk> things that might be really strategic to us that it might be on the product roadmap by way of.
What's largely been I would characterize as smaller product oriented or technology oriented tuck in acquisitions, and I think that that strategy and that viewpoint remains the case.
Got you that's helpful. Thank you and then.
Maybe just a quick one on the integration the what percent of your customers actually have an integration today connected through Payless today, just wondering to kind of see what the overall penetration and how that can actually look over time.
Yes.
Know that off the top of my head quite frankly.
A lot of our customers have integrations for a wide variety of things. So a 401K integration as an example benefits integration would be another point of integration and then you get into all of this stuff I mentioned prior ERP and so on and so forth.
So I think there is an opportunity to expand the number of integrations of the way I think about it I would imagine.
We see a future where every client has at least one integration.
And over time, we want to actually drive the number of integrations. So that they can really leverage the people data that we have in a real time workflow capability. They know when something changes about that person that will then enable one of their processes create automation and create an opportunity to.
Have higher levels of engagement and so our viewpoint is clients, we want to integrate with all of the systems that they use to run their business that leveraged people data that's the goal and objective.
Great. Thanks, so much.
Thank you.
Please standby for our next question.
Our next question comes from the line, albeit from Miami with Piper Sandler Your line is open.
Hi, Thanks for taking my question.
Good set of results. My first question is if anything about this kind of.
Investments channel.
Over the past few years.
Making you are.
Tim It seems solution more.
Thanks, Dan.
Engagement.
Suddenly collecting a lot of data.
And your level of sort of feedback some of the data.
Clients are there.
You're seeing value in it and down the road.
Do you expect that May drive some revenue growth in the longer term yes.
Yes, it's a great question and we've been investing for several years now kind of in machine learning artificial intelligence capabilities, you see that surface and our product already in a few different places and we do see many more opportunities as well. So one is our modern workforce index, where we look across our clients and we score customers based off how.
They are in our platform and we know the higher their score the more employee retention they have and we do that even by vertical markets. So we compare hospitality to other hospitality and then as they start to use more of the product they see their score going after the recommendation engine behind that starts to give them ideas on how they can get more value out of the product. We also will surface recommendations even to <unk>.
Lloyds around our people that they might want to connect with that they might want to communicate that they might want following community is certainly another place and then lastly, I would just say our dashboards and insights.
Is another place that we've tried to surface that but as technology continues to advance we see this being another opportunity to modernize our suite.
Pretty much every single module, leveraging newer technologies and artificial intelligence and machine learning.
Terrific.
Sort of help your win rates or is it.
This stage do you think it could drive revenue growth.
Sure Josh.
At a later point, it's a good question I think today, it's largely driving win rates and it's creating differentiation in the marketplace and I think as Tobi mentioned early when you've got such a huge Tam in front of you and a big market.
<unk>, that's really important to have differentiation.
The capability can be.
Ponant of new offerings that we have I am not sure we see at least in the immediate future that we would charge for a separate SKU on some of these capabilities, but as we launch new products being able to incorporate things like recommendation engine leveraging all the data that we have across the organization to get our clients to see best practices and implement new more modern capabilities.
That's where we see the more immediate opportunity than maybe a separate monetize volt products.
Yes, yes, yes.
That's been not today, but several years now I know you have been in 2018 19.
Today's community.
And then yes.
I appreciate your patience that trying to monetize our first introduced greater adoption and monetize.
I think thats a good approach.
Just a couple of.
Great great great.
Other questions one is on this.
So kind of employment levels.
Are you able to quantify how much of your growth comes from.
Yes.
Basically increased employment in existing clients.
I know in the past.
Outlines.
Expansion of existing clients.
Sure I can take that one I think if you think about in a normalized environment with a with a growing GDP you may get a point, maybe two in a normal period with client workforce levels.
Over the last three years or so you've seen significant movements. Both ways I think if you if you anchor back to the pandemic, we talked about up to a double digit impact on recurring revenue in fiscal 'twenty that bled over into fiscal 'twenty. One and then and then again I think if you. If you look at where we were from a spring of <unk>.
'twenty one all the way towards the summer of 2022, we saw nearly every single month sequential improvements and as we've talked about each of those quarters that has been a reasonable tailwind and you've seen outsized recurring and total revenue growth over that period of time to Toby's point earlier as you as you think about the back half of the fiscal year.
Year over year, there is still a little bit of a tailwind here in the third quarter as you get to the fourth quarter I think we've really fully anniversaried all of the client workforce levels improvements that we've seen over the last handful of years and you get back to that kind of low twenty's or so recurring revenue growth as we as we sit here and think about fiscal 'twenty four continue to have a.
Of confidence around go to market motion and our ability to continue to drive 20% plus as we get back to that more normalized employment environment.
Alright.
Thanks, Brian .
Thank you.
Sure. Thanks.
Thank you.
Please standby for our next question.
Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.
Hey, guys. Thanks for taking the question.
A lot of them have been asked but I guess one of the.
And questions, we get from investors and I'm sure you get to us.
You look at the headlines youll look at commentary, particularly about white collar recession or employment levels at some point starting to kind of tick in the other direction from the record strength we've had here.
Somebody asked.
Asked this question about your Q4 numbers around conservatism it sounds like Youre not seeing any change in employment levels and your customers, you're not even really seeing any change in sales cycle times in.
In your customer base for new New logos I guess, how is there a reason that you guys have been able to decipher as to why that is.
When you.
You would be anticipating seeing that impact from the macro economy or is there just.
A level of resiliency either from a share of market perspective or type of client perspective that you serve that gives you that resiliency on the recurring revenue line and maybe it's also just the mix of F&B versus larger customers that you're serving in your business, but would love to get some just further clarity.
Sure.
Obviously, we've been in this industry really my whole career and I've seen the different cycles. The interesting part I think to me about this cycle is you still have relatively low unemployment levels.
And certainly the headline news there are there are people, reducing their workforces, but there are still a number of jobs out there and we're still in a growth environment has been a lot of Lumpiness post COVID-19. The other thing I would say is hybrid work people moving from one industry to the next there is a lot of resilience in terms of being able to move from one job to the next being able to work from home.
<unk> anywhere in the country and so I think the labor force can react relatively quickly as we've seen these maybe shifts in demand as you said from white collar jobs.
And overall when I look at the longer term history is GDP is growing a little bit.
Employment, usually trail that a little bit from a percentage basis is declining a little bit.
Also going to decline trailing GDP and sometimes unemployment numbers.
Take a couple of months before you see it all the way through but if you think of all those headlines we've been flat for several months in terms of employment levels and that frankly makes sense to me based on what I've seen historically now that doesn't mean that that's certainly going to continue we have forecasted kind of a flat environment.
For our guidance for the rest of the year, but I think there's a fair amount of resilience in this type of employment environment, where people can move from one job to the next relatively quickly because of the rise of remote work.
So that's actually a really.
A really unique and great explanation, it's super simple and Super Super interesting.
Labor mobility effectively one of your clients loses somebody the Putback pop right up at one of your other clients.
I guess one other question I have is as I look at the Opex umbrella. It does look like for the first kind of this quarter specifically your growth in sales and marketing is meaningfully ahead of.
The recurring revenue growth on a year over year basis, which I guess to some extent makes sense because it's aligned with your total revenue growth what do we when you think about your ability to kind of almost not overinvest, but invest ahead at a level that maybe you haven't been able to invest in the last couple of years.
What are you.
If we think about the reaping the rewards of that kind of Frontloaded sales and marketing investment that you are able to make in the first half of this year.
Is it do you anticipated kind of driving.
Greater growth durability greater growth rate, when particularly when we start anniversarying some of those tougher comps.
Yes, I mean, I think what you've heard us say over pretty consistently over the last handful of quarters as we felt very good about the demand environment. We continue to we felt really good about the growth opportunity in front of us based on having relatively low share of a very large market I think what the message has been is.
We would continue to invest in certainly in sales and marketing.
In sales head count and in marketing and in channels, a lot of that being in the form of digital marketing.
Port for our channel initiatives, which continue to drive 25% plus of new business to us and I think what youre seeing in the first half of this year is the continued progress and the continued sort of motion against that strategy and.
I think we came into this fiscal year feeling really good about our staffing levels from our sales head count perspective.
And I think our strategy on an ongoing basis has been to continue to add talent in those areas, where we can given that from a from an overall business perspective sales and marketing is certainly along with product.
One of the big growth driving areas of the business and so I think you've just seen us continue to incrementally invest there in the first half of the year pretty consistent with how we've described it historically.
And Alex I'd, just add there if you think about.
Our financial playbook, so to speak as we've talked about this over several years, we've talked about consistently investing where we can in what Toby just referenced sales and marketing to drive continued revenue growth or R&D, which you also see this fiscal year and offsetting that youre seeing the scale and leverage across the areas that we focused on.
Brickley and continue to do so so really strong gross margin leverage this quarter year to date really strong G&A leverage this quarter and year to date and I think if you add all that together it allows us to drive in this quarter over 400 basis points of leverage when adjusted EBITDA perspective, while investing incrementally both in sales and marketing and R&D. So feel really good about.
That combination in addition to the strong revenue growth we're driving.
Perfect. Thank you guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Citi P. With Mizuho Group. Your line is open.
Thank you thanks for taking my question.
So you talked about is flat.
Growth within your platform. So when you look at the incremental recruiting revenue what percentage of that incremental revenue come from new customers versus cross selling new products late.
Increasing <unk> within their installed base.
The vast majority of what you see from a from a revenue growth perspective is attributable to.
New logo acquisition. So it's the result of selling new clients, we do as we've talked about.
Certainly the opportunity to sell back into the customer base that is on a relative basis still a smaller part of our overall revenue is still a smaller part of new sales and that continues to be the case through the first half of the year and certainly in this quarter. It is important to US we certainly continue to invest in it and the more that we have introduced new product over time certainly.
That opportunity has gotten and we've pursued it for sure but still the heart of the go to market motion of the bigger part of it is new logo acquisition.
Great and then a follow up to earlier questions in terms of employee client employment growth.
Exposure to multiple vertical industry, and putting tech and financial services. Some of this white color.
Industries, so what's the mix like what's your exposure to tech in any of the white collar industry.
Yes, I think as you think about our 30000 plus clients know client representing nearly anywhere close to 1% of revenue and to your point I think the breadth of our clients across various industries and geographies.
Pretty significant there's nothing particular I'd call out as far as being over under indexed to tack or any other particular sector I think.
Average client, having a 100 plus employees that composition would look pretty similar to the SMB space across the U S. There's there's nothing that I'd call out that is.
Particular note.
That's great Congrats again for a great quarter.
Thank you.
Thank you.
Please standby for our next question.
Yeah.
Our next question comes from line of Robert Simmons with D. A Davidson your line is open.
Hey, guys. Thanks for taking my questions I was wondering if you could talk about client retention has held up so far this year it and what have you built into your fiscal year guidance.
Yes, so far our retention rates have continued to be strong I mean, we have talked over the last few quarters.
Consistent with other sort of data points in the industry about us seeing the highest retention rate really that we've seen over the last handful of years that continues to be the case.
And I think overall I would say January is the busiest time in the industry. It's the busiest time for us as a company and I think we're really happy with how we came through January from a from an overall operations and an overall service perspective and.
I think the high level of client service that we've provided through the course of a pretty difficult time for our clients. During the pandemic has been a huge factor in us differentiating on service and being able to serve our clients effectively when they needed it and I think that's been a key contributor to still being able to see.
Record high retention rates from our last five year period perspective.
Got it that makes sense.
Yes, I think most of it thanks.
<unk>.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Jason <unk> with Keybanc. Your line is open.
Hey, guys. Thanks for fitting me in.
And I kind of summarize things it sounds like the demand environment still pretty strong you're executing really well and that your guide to kind of what's in front of you, but when we think about visibility how would you say your visibility is today and how it's changed versus maybe pre COVID-19.
Yes, so I'm not sure I'm.
Sorry to have kept our head of you there let me start I would just start by saying from a visibility perspective, our model being recurring revenue and the fact that a big part of our revenue is retaining existing customers and then you overlay of new customers and new recurring revenue as the year goes along so think about it as we go along in that year, we get greater.
Visibility to only two quarters left obviously January being a huge part of our selling season.
At this stage, we have better visibility than we certainly did last quarter and significant visibility because we know what our retention rates are.
We've got pretty decent look into the pipeline of new business and so it's just one of the benefits I think of this business model that we've got I don't think though at the size and scale that we're at now versus maybe three or four years ago pre COVID-19. There is a different level of visibility I think it was just more inherent in the business model and where we're driving that.
Revenue growth.
Perfect. Thank you.
Thank you.
Ladies and gentlemen that concludes our Q&A session I would now like to turn the call back to Steve for closing remarks.
Yes, I just want to take a quick moment to thank everyone at Pelosity for all their hard work and effort over a very busy year and I mean.
And of course, thank all of you for your interest in philosophy, everyone have a great evening.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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