Q4 2023 Paylocity Holding Corporation Earnings Call
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Hello, and thank you for standing by welcome to pay Law Citi Holding Corporation fourth quarter 2023 fiscal year results Conference call.
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Good afternoon, and welcome to pay lots of these earnings results call for the fourth quarter and fiscal year 'twenty, three which ended on June 32023, I'm, Ryan 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 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.
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 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.
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 Securities and Exchange Commission.
Please note that we're 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 upcoming conference schedule, Toby will be attending the Stifel Executive summit in Deer Valley on August 29th and the Citi Global Tech Conference in New York on September 7th and I will be attending the HR Tech conference in Las Vegas in mid October . Please let me know if you'd like to schedule time with us at any of these events with that let me turn the call over to Steve.
Thank you Ryan and thanks to all of you for joining us on our fourth quarter and fiscal 'twenty three earnings call.
Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and helped drive total revenue growth of 34, 7% in Q4 for fiscal 'twenty. Three we reached a key financial milestone for the company with total revenue crossing the 1 billion threshold and finishing at just under $1 2 billion or 37.
8% growth over fiscal 'twenty two.
Our solid results were once again, driven by both adding new clients and employees and increasing average revenue per client. We ended fiscal 'twenty three with 36200 clients compared to 33300 at the end of last fiscal year, an increase of 9% while total employees on our platform grew by mid teens consistent with the historical.
Trends and in part driven by the success, we're seeing up market as larger clients realize the benefits of our sustained investment in product development and the most modern platform in the industry revenue retention also remained strong at greater than 92% average recurring revenue per client with over $30000 in fiscal 'twenty three compared to just over 25000 infants.
22, an increase of 19% as a result of increased employees on the platform rising product attach rates across our client base and success with larger clients.
We continue to attach more product at the time of sale and it realized increased success selling back into existing clients as our products focused on the most modern workforce resonate across our entire client base.
Our sustained investment in product development allows us to continue to expand our product suite evidenced by the recent announcement of several new premium offerings and feature enhancements, including advanced scheduling learning management and market pay advanced scheduling and build upon our existing scheduling capabilities by adding advanced features such as the ability to match scheduling needs with employees based.
On job function or role skill set and certifications as well as swap claim managed shift directly via our mobile device.
Similarly, new enhancements to our learning management module allows users to easily create and share new training via community, including a new safety training bundle 20 courses to help clients ensure on the job safety and compliance lastly, the most recent addition to our suite of modern workforce solutions market pay allows our clients to easily explore track manage and comp.
Bear market pay data across different job families and physicians to help make better compensation decisions evaluate specific roles accurately and comply with paid in equity job posting requirements in multiple states collectively these three new product offerings, along with continued investment across our product suite has increased our <unk> to 500.
Dollars.
Achieving the target we set four years ago as a risk.
We are now raising our <unk> target to $600 and are confident in our ability to achieve this goal in the coming years, and we continue to develop and deliver market leading new products.
Our commitment to product development continues to be recognized in the market with Pelosity recently being named an overall leader intent HCM product categories in <unk> Summer 2023, Great reports. Additionally, pelosity was recognized as trust radius top rated HR management software platform for 2023.
One to 2023 best human capital technology solution in the <unk>.
Business Technology, Codie Awards, and achieved a leader ranking and Nelson House 2023 next Gen. HCM technology unique report for both the SMB and mid and large market segments.
Our strong culture industry, leading software and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees as we close out a very strong fiscal 'twenty three I would like to thank all of our employees for a fantastic year I would now like to pass the call to Toby to provide further color on the quarter and fiscal 'twenty three.
Thanks, Steve as Steve highlighted we continue to build upon our differentiated value proposition of providing the most modern software in the industry with the introduction of new premium products and feature enhancements.
Still early the value proposition of these new capabilities is clearly resonating in the market as evidenced by one of our professional services clients with over 300 employees already leveraging market pay to analyze compensation for a comparable positions to insurance payer remains competitive and to help attract and retain high quality talent and an increasingly tight labor market in <unk>.
Q4 in fiscal 'twenty three this dynamic was reflected in solid sales execution across our entire target market and we plan to continue investing in go to market initiatives to carry this momentum forward into fiscal 'twenty four.
We've expanded our sales force for fiscal 'twenty four by 18% from 694 sales reps in fiscal 'twenty three to 820 reps in fiscal 'twenty, four and I'm pleased that we're fully staffed heading into the new fiscal year.
We also continue to invest in our channel initiatives and we remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in Q4 and full fiscal 'twenty. Three in addition to an 18% increase in sales reps for fiscal 'twenty four we remain committed to continuing our investments in digital marketing and digital lead generation to support.
Our go to market motion.
As a result of our strong financial performance, including our adjusted EBITDA margin of 31, 9% and free cash flow margin of 18, 4% in fiscal 'twenty, three which puts us well into the range of our current financial targets, we're increasing certain of our targets beginning in fiscal 'twenty. Four this is a reflection of our strong financial performance in fiscal 'twenty, three and I'm very pleased.
With our ability to continue to grow while demonstrating the scalability and leverage in our business model, while Ryan will provide additional detail. We're pleased to continue to target, 20% plus total revenue growth with an increased adjusted EBITDA margin target of 35% to 40% of revenue and an increased free cash flow margin target of 20% to 25% of revenue.
The strong cultural Pelosity continued to be recognized externally. This fiscal year as we were named to built ins Best places to work and among the best and brightest companies to work for in the nation. Additionally for the second year in a row. We also earned placement on Forbes' list for best companies for diversity and best employers for women echoing Steve's comments I would like to thank all of our more.
6000 employees for a fantastic fiscal 'twenty, three which would not have been possible without their dedication and commitment to our clients I would now like to pass the call over to Ryan to review the financial results in detail and provide fiscal 'twenty for guidance.
Thanks, Tobey total revenue for the fourth quarter was $308 5 million, an increase of 34, 7% with recurring and other revenue up 24, 3% from the same period last year as Tobi noted our sales team had another solid quarter and we were pleased to come in $5 $3 million above the top end of our guidance range.
Adjusted EBITDA for the fourth quarter was $100 six.
$6 million or 32, 6% margin and exceeded the top end of our guidance by $4 1 million for fiscal 'twenty. Three adjusted EBITDA was $375 2 million or 31, 9% margin, resulting in leverage of 400 basis points versus fiscal 'twenty two.
Additionally, we made significant progress on free cash flow with fiscal 'twenty three margin of 18, 4% up nearly 650 basis points and an increase of 111% on a dollar basis from fiscal 'twenty to.
We remain confident in our ability to continue expanding free cash flow margin in fiscal 'twenty four and beyond.
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 combined non-GAAP basis total R&D investments were 15, 2% of revenue in the fourth quarter and on a full year basis total R&D investments were 14, 5% of revenue.
On a dollar basis, our year over year investment in total R&D increased by 45, 7% in fiscal 'twenty, three when compared to fiscal 'twenty two.
We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth.
On a non-GAAP basis sales and marketing expenses were 22% of revenue in the fourth quarter and fiscal 'twenty three.
On a non-GAAP basis G&A costs were 10, 7% of revenue in the fourth quarter versus 13, 2% in the same period last year full year G&A costs were 11% of revenue as compared to 12, 9% in fiscal 'twenty, two and we remain focused on consistently leveraging our G&A expenses on an annual basis.
Briefly covering our GAAP results for Q4 gross profit was $211 7 million operating income was $49 4 million and net income was $37 3 million for the full year gross profit was $807 6 million operating income was $155 million and net income was $140 8 million.
In regard to client held funds and interest income our average daily balance of client funds was $2 5 billion in Q4, and $2 4 billion for fiscal 'twenty three.
We are estimating the average daily balance will be approximately two three to $2 4 billion in Q1 of fiscal 'twenty four with an average annual yield of approximately 410 basis points.
A full year basis, we are estimating the average daily balance will be two five to $2 6 billion in fiscal 'twenty four with an average yield of approximately 420 basis points.
Our guidance includes last weeks 25 basis point increase but does not currently include any other changes to interest rates in fiscal 'twenty four.
Before I provide our financial guidance as Tobi mentioned, we are updating certain of our key financial targets since setting our current targets in August of 2018, our adjusted EBITDA has increased from 21, 5% of revenue to 31, 9% of revenue an improvement of over 1000 basis points and our free cash flow margin has increased from 12, 9% of revenue.
The 18, 4% of revenue of 550 basis point improvement.
As a result of our strong financial performance and scalability of our business model. We are revising certain key financial targets, which we expect to make progress against beginning in fiscal 'twenty four.
In regards to total revenue our goal of 20% plus growth remains our target and we continue to be confident in our ability to achieve this goal.
Our adjusted total gross margin target has increased to 75% to 80% from 70% to 75% our general and administrative spend target is reduced from 10% to 15% of revenue two 5% to 10% of revenue.
Adjusted EBIT target has increased to 35% to 40% from 30% to 35% and our free cash flow margin target is increased to $20 to 25% from 15% to 20%. Please.
Please refer to our earnings press release for additional details.
Finally, I'd like to provide our financial guidance for Q1 and full fiscal 'twenty four.
For the first quarter of fiscal 'twenty for total revenue is expected to be in the range of $314 1 million to $318 1 million or approximately 25% growth over first quarter of fiscal 'twenty three total revenue.
And adjusted EBITDA is expected to be in the range of $89 5 million to $92 5 million, which represents approximately 250 basis points of leverage over Q1 of fiscal 'twenty three.
And for fiscal year 'twenty for total revenue is expected to be in the range of $1 405 billion to $1 410 billion or approximately 20% growth over fiscal 'twenty three.
And adjusted EBITDA is expected to be in the range of 464 million to 468 million, which represents approximately 120 basis points of leverage over fiscal 'twenty three.
As it relates to the broader macro environment workforce levels continue to be roughly flat in all material respects. This is contrary to what we have historically experienced in a normalized business environment with recurring revenue typically benefiting from two to three points of growth driven by broader GDP expansion and workforce levels.
Our guidance assumes this trend of flat workforce levels continues in Q1 and fiscal 'twenty, four and thereby representing an equivalent of two to three point headwind to recurring revenue growth.
After crossing the $1 billion threshold in fiscal 'twenty, three and with continued investments in our go to market motion and product roadmap, we enter fiscal 'twenty four with a high level of confidence in our ability to continue to drive strong revenue growth, while simultaneously scaling our business and driving continued adjusted EBITDA and free cash flow leverage.
Operator, we are now ready for questions.
Thank you.
Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear you name them now.
To withdraw your question. Please press star one again.
Please standby, while we compile the Q&A roster.
Okay.
Our first question comes from the line of Brad Reback with Stifel. Your line is open.
Great. Thanks, very much Steve if we think about the 18% increase in sales force head count entering the year.
As well as the success Youre, having dry driving heart higher <unk> into the base.
Any reason, we shouldn't think of 18 is the absolute bottom.
And in fact, not being able to do a little better than that on the subscription side.
I think.
If you look at our guidance it hasn't changed from a philosophy perspective. So we're at the front end of the year and Theres a lot of execution in front of us being able to guide to total revenue of 20% revenue growth, we feel really good about we've got all the heads.
Onboard and up and running which is always a goal for us at the start of the year.
<unk> got a product suite that we have enhanced pretty significantly and so we feel pretty good about the momentum certainly our guidance wouldn't contemplate SB below the 18% on a recurring basis. So I think thats a reasonable way to think about it but we feel confident in our ability to hit the goals and I think we have a history of being able to do even better than our initial guidance.
<unk>.
Perfect. Thanks very much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Raimo Lynch Chau with Barclays. Your line is open.
Hey, great. Thanks for taking our question. This is sheldon on for Raimo.
For our product portfolio grows with adding the new capabilities and talking about the <unk>.
$600.
Per employee per year target, how are you thinking about revisiting your install base and kind of the installed base opportunity, particularly as we enter a more normalized growth environment is there any opportunity to lean more into the upsell motion and 24. Thank you.
Sure.
We really started selling back to the client base back in 2018, so we've been doing that for a number of years and we've been increasing that inside sales team at a much faster rate than the rest of our sales force really since we started back in 2018, so that team did really well this past fiscal year.
We're really happy with the success, we are certainly increasing that team the omni averaged 18% head count and so it will have a more material impact going into next fiscal year, but.
It still represents a small portion of our overall revenue growth. We are still focused on primarily landing new customers.
Then continuing to enhance our product portfolio, therefore, giving more products for our inside sales team to sell back to the client base. So yes, it's the right way to think about it that will gradually continue to get bigger and it is growing faster than our outside sales team.
And a quick follow up if I may it's nice to see the.
I would say faster than peer generative AI roadmap I was just wondering how are you feeling about AI ml talent engineering talent out of your organization and just more broadly thinking about the R&D head count investment.
Yeah. So I think I'll take the second part first so from an R&D head count investment we've been pretty consistent when you look at what we expense and capitalize being around that 15% of R&D. This is definitely a competitive space, it's a pretty dynamic workforce environment, where we have lots of product ideas that we get from our customers and that we feel we can add to the products.
Sweet so.
We've maintained a pretty steady level of R&D investment when you look at it as a percentage of revenue and I think that philosophy is what we have going forward. There's lots of things that we think we can do to enhance our portfolio on the first part of your question.
We really started to data practice team about four years ago.
And so if you go back we've had predicted capabilities in our platform around who might leave a customer we've got our <unk> Wi based off algorithms and so we've had a team that's been investing in that space for a while I think that's what allowed us to get to market relatively quickly with the general AI capabilities, both in community and now in job descriptions and we've got a long list of places, where we think we can.
Continue to add those capabilities for our customers.
Great. Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Bryan Bergin with TD Cowen Your line is open.
Hi, guys. Good afternoon. Thank you wanted to kick off with kind of a.
Fiscal 'twenty four growth cadence question. So as we think about what you've guided to here in the first few guide relative to the fiscal 'twenty four growth guide, particularly on recurring can you just give us a sense whereabouts do you anticipate the recurring growth cadence to kind of trough out.
Yes, maybe I'll start Brian to jump into I mean, I think when you look at the first half of the year, obviously, that's where the hardest comps are relative to last year.
Yes, I think overall, we feel very good about the guide that we provided going back to Steve Steve's comments, a few minutes ago just getting.
Guiding to that 20% mark for the fiscal year.
And I think obviously like I said I think the first half is the toughest from accounting perspective, but I think we feel pretty good about the momentum that we have across the business from a recurring perspective, and certainly excited about a lot of the product announcements that we've made and feel pretty good about the adoption that we've seen across the portfolio.
In the interim.
Products that we had announced and I think while it may take it's early days for the things that we've just announced you probably start to see more actual impact from that when you get to the back part of the fiscal year, but I think from a momentum perspective feel pretty good about what we're seeing from a from a sales perspective, we feel pretty good about the momentum we have the new product.
Police and adoption and.
I think overall feel very good about being able to guide us to.
20% for the fiscal.
Okay. Okay makes sense and then follow up on the long term target. So it's nice to see the great. So on EBITDA and free cash flow margin within gross margin and G&A. Specifically can you talk about some of the bigger sources of expansion just obviously understanding natural leverage on broader scale, but are there other key levers you have here to discuss.
Does that gives you that confidence.
Sure I think gross margin, we've consistently expanded since IPO in 2014 and I think.
The reason for us being able to do that if you hit one of them scale, but I think the second one is a lot of the new products that we've added.
Always required the same lift either from an implementation or ongoing service perspective, when you think about the three additions that we had now those are all incremental from a gross margin perspective, so as we see our revenue mix shift to some of the newer products. We've added we get natural lifting in gross margin and Thats, probably the biggest driver.
Okay.
Thank you.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of Terry Tillman with <unk> Securities. Your line is open.
Yes, Thanks for taking my question and follow up I guess, maybe the first question just relates I think in the prepared remarks. When you all were quoting some of the stats mid teens employee growth and I think you talked about larger customers was there anything notable in <unk> about the mix of bookings coming from larger customers and then kind of any quantification on is the size of the larger customer increasing in the second.
Part of this question is based on the 18% sales capacity growth.
Do you foresee maybe a mix shift from where the business is coming from large mid sized or smaller customers in FY 'twenty four.
Sure I think the last part of your question is we did have a mix shift if you go back several years ago first we kind of expanded below our original target market and then we expand that up in our target market. We started to see success up market in particular at an accelerated rate and we put more resources against that.
I think that was the case over the last couple of years, but that is probably steady now.
We really feel good about the mix that we have in each segment and we think about the growth rate of the 18% head count growth being fairly similar across each of the segments.
Okay, Great and just a follow up is on I think there was a comment about workforce level being flat for <unk> did you say anything about like the assumption or what you're thinking about for the full year on workforce levels same thing or any different dynamic. Thank you.
Yes, Terry this is Ryan I think the same approach and I think we've been consistent with this methodology going backwards at the beginning of the pandemic. So we guided to what we can see.
As we said in our prepared remarks workforce levels has effectively been flat really going back 12 to 13 months at this point. So we assumed flat levels certainly for Q1, but for the balance of 24, and we will certainly watch those and update you all as we get deeper into the physical.
Okay, great. Thanks.
Thank you.
Please standby for our next question.
Our next question is from the line of Brian Peterson with Raymond James Your line is open.
Hi, gentlemen, thanks for taking my question so.
Steve I wanted to hit on maybe sort of different weapons. Okay.
Things that people are talking about is the ability to really accelerate product and software development cycles I'd be curious to hear how you guys are thinking about using it internally and do you think that could have a meaningful difference in terms of either the margin or how quickly you can develop a product sure.
Sure Yes.
Yes, I think just stepping back I think I will impact every part of the business, whether that's how we service customers and onboard customers, whether that's how we're building software products and using generative code building tools.
And then whether its capabilities that we can actually deliver to the customer that drives efficiency for them. So we're looking at all aspects of it we've certainly been actively using that behind the scenes I think we've found a lot of success generating test use cases.
From a code perspective.
Probably where we get kind of are on that journey.
But we are a pretty passionate that.
A really interesting opportunity across all aspects of our business.
Great and maybe just a quick follow up I know you mentioned, the 18% growth in the sales head count and any comments on how the tenure of that group looks and thoughts on expectations for fiscal year 'twenty four thanks guys.
Yeah, Hey, Brian So yes.
Yes, I mean I think overall.
We came into the year fully staffed which were which are really happy about that has been the case over the last.
A few years at least and.
Came into this year growing the sales force at 18% consistent with what we did last year and I think overall feel really good about the mix of talent that we have in that.
Certainly.
SKU as we would have historically done towards.
<unk>.
Folks coming in with industry experience, which has always been productive for us and I think we're overall really happy with how were staffed as we come into fiscal 'twenty four.
Thanks, guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Patrick <unk> with JMP Securities. Your line is open.
Hi, This is <unk> on for Patrick Thanks for taking the question. So I'm curious about the like.
Our customers timelines are kind of ramping up with product adoption sort of played like say start out with us with the payroll products how.
How long would it take them to kind of adopt adopt other products in the suite.
Yes. So I think you can look at it through two different ways. So one is if you.
We talk about the number of employees that we've got kind of on the platform. The average sized customer that we have we give you. The employee count you can really calculate that realized PPI, which is kind of typically been 50% to 60% of our maximum <unk> and so that gives you a sense because we bundle and package that gives you a sense of what they're buying in terms of the total available opportunity. So there is still lots of.
The opportunity to drive that higher.
And so that's probably the easiest way to look at it I think conceptually as we build new modules, we definitely feel like that we can get that module into the 10% to 20% range overtime.
That gives us the ROI and the conviction to be able to kind of build something for customers. Some of our modules are 50% plus product penetration rate. We've got some still below that 20%, but we've got to have conviction that we can get into that range before we actually build and launch the product.
Awesome. Thank you and then so I know this isn't like the main focus right now, but thinking kind of longer term the expansion opportunity within our business.
How much of that is driven by the increase in our in our customers' employee talent versus.
Increasing GDP why buy new products.
Yeah, so historically in a growth GDP environment.
Let's say GDP was growing 2%, 3%, we would typically get two or 3% in our client base of additional employees, which translates to roughly that same revenue growth number because people pay us on a per employee basis. So that was pretty typical as Ryan mentioned for over a year now the number of employees on the platform has been flat. So our clients are losing employees, but they're also not adding <unk>.
So there is no necessary tailwind from that.
So really at this point when you look at the results, we're delivering theres no help from extra employees on the platform that.
Matt I will just comes from selling new customers clearly and so it's really being driven from selling more to every new customer that is kind of coming on board and then having that insight sales team I spoke about earlier actually selling back to the client base that second part being a smaller portion than the first.
Awesome. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Scott Berg with Needham and company. Your line is open.
Hi, guys congrats on the quarter and thanks for taking my questions here of this Michael Rockers on for Scott today.
I was just curious kind of on your thoughts and maybe some commentary around the opportunity.
What the global payroll space I mean, do you see international kind of.
The next stage of growth over the long term.
Just what are your kind of thoughts on the general trends there. Thanks.
Yes, So I think we're definitely squarely focused on the opportunity in the U S. We still have relatively low penetration in terms of the target market that we're going after so.
We see huge Tam that we've got to focus on and we definitely have got a product set that we think creates differentiation, where we do see a need to be able to have some global capabilities is when you've got a U S. Headquartered customer who may have some number of employees abroad.
And so that's why we obviously had purchased blue marble and integrated that into our suite. So we can handle that need for customers. So they can be a philosophy customer and they can pay their 10, 2030 50 employees abroad through blue marble and the network of partners that we leverage and so that has been our strategy globally.
And we will always look for interesting opportunities, but our primary focus will be U S headquartered companies and with the size of the Tam that we've got in front of US we think there's plenty of opportunity there.
Awesome. Thank you.
Okay. Thank you.
Please standby for our next question.
Our next question comes from the line of Mark <unk> with Jefferies. Your line is open.
Hey, good evening, Thanks for taking my questions maybe.
Maybe first one just as I think about the.
The bookings cadence or linearity in the quarter can you maybe just help us understand how.
Rob the May to June trends.
How does that compare to normal booking seasonality in our fiscal fourth quarter.
Hey, John I mean, I don't think we saw anything different from a from a.
Linearity perspective in terms of the bookings coming in I mean, I think obviously when you look at as I said, a few minutes ago. When you look at last fiscal year, you had heavy compares coming in in the first half, but I think as we got to.
So back half of this this last fiscal year I don't think we saw anything different in terms of seasonality or difference in performance quarter to quarter or year over year from from a sales perspective, I think the only thing.
Probably note is just going back to comments that we've made over the last probably a handful of quarters and that Steve made a few minutes ago. Just in terms of obviously incrementally better performance up market, but I think that just reflects probably the strength of the solution and what we've done from a product perspective, just being more competitive there overtime.
Great.
And then asset sales related question I've never worked itself out.
This is a bad one but I'm curious when you think about just the unit count growth of sales reps.
Does it does it is the number of heads matter is like if you're targeting larger deals do more reps to work on a larger deal or is it still the same number of side just how should we think about theyre targeting larger customers and sales rep count.
Yes, so we have consistently.
Coated sales rep space off annual recurring revenue and new annual recurring revenue.
Our sales reps natural behavior is they will go for the larger customers because theres more employees, there and that gives them more new.
Revenue, but the reality is we also get significant business through broker referrals. So that's over 25% of our business you've kind of got a follow those leads wherever you wherever you can find them.
Client referrals. So you kind of follow wherever you go so you can't purely just target the larger customers you really got to go after what's available to you and frankly some of our best reps they've got great productivity. When you look at the unit volume as well as the amount of product that they sell and the last thing I would say, we also talked about the fact that some of our most experienced reps, we've specialized and having them.
Focus up market.
So that's another way that we don't get everybody chasing the bigger deals that we focus on the best and most experienced people to go after those larger customers and that's been a good formula for success for us.
Great I appreciate taking my questions. Thank you.
Thank you please standby for our next question.
Our next question comes from the line of Mark Mccaughan with Baird. Your line is open.
Hey, good afternoon, and thanks for taking my questions got two questions. The first one is basically can you talk a little bit about the pipeline you're currently seeing.
How does that compare to a year ago.
How active is it.
Reason to think that salesforce productivity and conversions wouldn't be as good as they have historically been.
Yes, it's a good question Mark I would say, there's no real big call out when we look at the pipeline. The pipeline is growing nicely as we add reps and they continue to put more opportunities in top of funnel.
It's a little challenging from a history perspective, when you think of Covid and all of the environment that you came you came out of Covid, you had a little bit of a bounce out of Covid in terms of people not having done things for a while we're now kind of getting back into a more normalized environment and so I think as we continue to see the pipeline build and we look at that.
Almost from a pre COVID-19 level, we feel really good about the activity levels that we're seeing and how we're ramping.
New reps.
Great.
Really appreciate the updated financial.
Targets.
We're targeting roughly 120 basis points of margin improvement for this year, how should we think about the cadence of the margin improvement.
Towards going towards the top end of <unk>.
The target range, when we strip out the impact of float.
In terms of the interest income.
Hey, Mark It's Ryan I think if you step back and probably think about the journey. We've been on since we set those initial targets five years ago in August at 18 I referenced.
A few data points in the prepared remarks on adjusted EBITDA and free cash flow leverage that you've seen over that period of time.
As you said, we sit here well into the previous targets and I think continue to have a lot of confidence in our ability to drive leverage, particularly in gross margin and G&A at the same time as we have historically invest in sales marketing and R&D and I think when you pull that forward to the initial 24 guide on the backs of.
<unk> leverage we saw across adjusted EBITDA and free cash flow in 'twenty three setting out that initial guide as you said of north of 100 basis points of adjusted EBITDA leverage.
I think that is certainly something that is reasonably close to what our target would be annually. I think we've had years, where we started closer to 50 basis points of leverage in through over performance has been able to take the guide up but I think we feel good being able to start the year at that 20% revenue growth number at the same time continue to make progress there on adjusted EBITDA.
Great. Thank you.
Okay.
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 I guess, maybe wanted to ask one about the <unk>.
Configuration of the guidance for next year is it safe to say that we're still we're assuming kind of.
Single digit high single digit net client net ads for the year, where the bulk of the growth is going to come from.
Larger both larger lands and more expense and then maybe just if you can double click on how much you expect.
Growth for the year to come from the installed base selling compared to where maybe where you ended fiscal 'twenty three and then any comments on just the competitive environment, who you are taking share from increasingly et cetera.
Okay. So maybe start in reverse order I wouldn't call it anything different from a competitive environment. It's always been very competitive it's kind of the usual suspects.
And really our points of differentiation come down to the solutions and really providing a very modern experience. So no change there in fact, we feel good about our roadmap to be able to continue to compete from that perspective.
I think in terms of.
Some of the other points, Brian are to where you want to handle one of the other pieces, yes, I don't think I mean, I think to start I mean, I think in terms of your question in terms of what the mix is from a growth standpoint and across sort of the target market I mean I think.
While it's been different every single year.
We with what we're seeing right now I don't think we have any different expectations for fiscal 'twenty four in terms of the mix of business relative to what we've seen kind of over the course of fiscal 'twenty three.
To Steve's point that the competitive environment.
It's always been competitive I don't think we see any major shifts there and I think our plan for for 'twenty four contemplates largely what we've been seeing over the course of the last few quarters.
Perfect. Thank you guys.
Thank you.
Please standby for our next question.
Our next question comes from the line of Dan Jester with BMO capital markets. Your line is open.
Great. Thanks for taking my question I wanted to ask about the $500.
<unk> it.
It seems like a really big step up compared to last year and so I'm just wondering what fletch year. This year introduced so much new product is it youre, just seeing better productivity out of R&D organization that the types of products that you're launching or just maybe easier to get into the marketplace. Maybe just help me think about that big step.
Because it seems the biggest in several years.
Yes, it's a good question.
I think we've been pretty.
Pretty happy with our velocity in R&D overall, sometimes these things do happen, where you're doing a lot of work on the backend some products can take you.
Nine or 12 months to build you may have other products that are multi year efforts that youre kind of working on so the timing of launch can be very different and so I think what youre seeing is the product of a couple of years of pretty strong work.
And the other thing I would say is we've also focused on some some platform capabilities.
That would allow us to go faster across R&D, and so I feel like the investments we've made over the last couple of years, you're starting to see now in terms of the new product launches, but I think it actually more importantly positions us to be able to have high velocity on a go forward basis, and that's pretty exciting for us.
Great. Thank you and then I appreciate the new financial targets maybe.
Any update on how youre thinking about capital allocation.
Organic growth.
Going into the new year. Thank you.
Yes, I don't think theres any different contemplated from a capital allocation perspective.
Our view has consistently been that.
To use capital to be able to drive growth.
Obviously youre seeing the strength right now as Steve was just talking through and our ability to organically develop and deliver product to continue to drive differentiation in the market, but I think I don't think theres any subsequent change in our view on capital allocation as we think about fiscal 'twenty four.
Great. Thank you very much.
Thank you.
Please standby for our next question.
Our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is open.
Great. Thanks.
Just two quick ones when we think about Opex in R&D.
Growth for the upcoming year.
The deceleration of our thing just kind of a return back to a more normalized.
<unk> spending after that too.
Your previous years, then some pretty heavy investment.
Yes, I mean, I think that's right. If you look at the spend levels that we had in fiscal 'twenty. Three I think total R&D was up about 46% both in Q4 and the full fiscal year and I think what youll see as we head into a more normalized environment in fiscal 'twenty four youll see R&D spend in sales and marketing as well kind of back to that historical cadence.
The tracks much closer to revenue growth.
Great and Ryan when we think about the two to three points.
Headwind from the stocking levels likely being flat for the coming year will that be pretty consistent each quarter.
I imagine that way, but just wanted to check.
Yes, nothing I'd call out from a seasonality standpoint, I think it's pretty consistent and each quarter. There's nothing of note from that perspective.
Great. Thank you.
Thank you.
Please standby for our next question.
Our next question comes from the line of Andrew Wong with D. A Davidson and company. Your line is open.
Okay.
Oh I'm sorry, I think this is actually for me. This is Robert Simmons on for myself.
So thanks for taking the question you touched on the general topic, but more specifically can you talk about how <unk> is performing.
In terms of helping you win new clients and for cross sell.
Yeah. So we've called out the success that we've had upmarket and that is where you run into more international opportunity. So customers might have employees in multiple countries and so definitely blue marbles in a component of our product suite that has created a nice differentiation upmarket. So if you're a customer and you've got 500 employees.
And you have 50 employees in three different countries. We've got a great solution for you. We can handle everything that you need and that does become a differentiation point in terms of us selling those customers and so I think it's been a nice contributor up market. It continues to grow as well when you look at the Standalone revenue that we bring in from those opportunities.
The biggest thing is really focused on the differentiation upmarket.
Got it.
And then.
Great to see the other.
A revised long term targets do you have a timeframe for what do you think you can achieve those and get into those ranges and then also how long do you think that you can maintain 20% plus growth.
Okay, and then you hit the second part and let Steve hit the last part of your question I think when you can.
Set the previous targets in August of 2018, I think we're five years later and we were well into those ranges. So I think thats, probably the right way to think about it we don't have a specific year that wed expect to hit those but I think at the same time, our expectation would be we would continue to make progress beginning in 'twenty four and on an annual basis towards those revised targets.
Continuing to have a high degree of confidence in being able to grow the business at a healthy rate in the same time scale across the business as well.
And in terms of continuing to grow at 20% I think Toby mentioned earlier, we're definitely focused on growth is a big priority for us.
And what's going to drive that we're going to make the investments in product we talked about how we're excited about what we've got coming out and have a rich product pipeline that is one of the key elements that gives us some confidence on being able to focus on that bringing on the talent from a sales perspective, 18% head count increase puts us in a really good position to be able to drive that.
Huge Tam right, we've got relatively low penetration in terms of the opportunity. So it really comes down for us to be able to kind of execute size of the opportunity is big enough. We got enough product differentiation, we've got a great pipeline.
And so and I think as Tobi mentioned, we have strategically made some some smaller acquisitions that also have enhanced our capability I just answered the question around blue marble and so when you put all that together I think that's what gives us confidence in terms of being able to continue to grow at 20% plus.
Great. Thanks.
Thank you.
Please standby for our next question.
Okay.
Our next question comes from the line of city panel Guava.
Your line is open.
Thank you. Thanks, Thanks for taking my question.
I wanted to ask about on demand pay that's one something you announced long back and now most of the competition most of your competition have.
That solution, how important is that for your customers like what sort of we haven't heard from you any kind of traction there or are you trying to revamp that product at all or is it more to help.
Help you win or is that really generating revenue and any color on that.
Yes. So we were one of the first to market with our on demand pay products. So we've had that available several years.
And I would say that the customers that really see value in that often have larger hourly populations, where they will actually request early access to their wages fairly frequently.
And so that products worked really well for us we've made based on customer feedback some enhancements to the product on an ongoing basis. The product is doing well I think from the first day that we launched it I never said this was going to be a big needle mover I really characterize it as a nice feature that customers could take advantage of and I think thats kind of how it played out for us overall.
But I do think you need a product like that end customers are getting value from it but it isn't it isn't a big driver for us.
Alright, and then I wanted to ask you about the AI is just like you guys announced that in March any any feedback from early adopters, but broadly I want to ask well how do you think this HR and payroll industrial evolves as you start seeing this AI adoption and where do you see the opportunity to monetize for that.
Sure I think if you just take a step back and you think of some of them.
The big challenges that HR teams have you got a very dynamic workforce Gen Z entering the workforce gig work, increasing globalization kind of back on track and increasing as well and so it's just a complicated environment for HR teams to really get the talent that they need in a fairly tight labor market.
So I think when you then overlay that with AI AI creates opportunities for efficiency for HR teams. It creates opportunity to then use that time from efficiency to be able to drive a more engaging environment and actually really compete on our culture basis.
So we see our early clients doing that so they are communicating more with their employees to driving engagement.
Got a ton of use cases that we plan on rolling out over time that will make it so much easier for <unk>.
Communication engagement culture building initiatives and I think that's going to be really important for our clients.
Our attempt to win the war for talent.
Thank you.
Thank you.
At this time I would now like to turn the call back over to Steve for closing remarks.
Well first of all thank you to all of you for dialing in and having interest in pay lost any and I just want to kind of restate Mike. Thank you for all of our Pelosity team members 6000 strong that delivered a fantastic fiscal 'twenty three and looking forward to another great year in FY 'twenty four.
Okay.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Okay.
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