Q2 2024 Paylocity Holding Corp Earnings Call

Okay.

Operator: Hello, and thank you for standing by. Welcome to Paylocity Holdings Corporation's second quarter 2024 fiscal year results conference call. At this time, all participants are in a listen-only mode.

Speaker Change: Hello, and thank you for standing by walk them to pay Laski Holdings Corporation second quarter 2020 for fiscal year results Conference call.

Speaker Change: At this time all participants are in a listen only mode.

Operator: After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone and then wait to hear your question, and then you will hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. I would now like to hand the conference over to Ryan Glenn.

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

Speaker Change: The question during the session you will need to press star one on your telephone and then wait to hear you and then you were here automated message advising your hand is right to withdraw your question. Please press star one again.

Speaker Change: I'd now like to hand, the conference over to Ryan Glenn Sir you may begin.

Ryan Glenn: Sir, you may begin. Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of Fiscal 24, which ended on December 31st, 2023. I'm Ryan Glenn, Chief Financial Officer, and joining me on the call today are Steve Beauchamp and Toby Williams, co-CEOs of Paylocity. 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 those implied by these or other forward-looking statements.

Speaker Change: Yeah.

Speaker Change: Good afternoon, and welcome to Pelosity his earnings results call for the second quarter of fiscal 'twenty, four which ended on December 31, 2023, I'm, Ryan Glenn Chief Financial Officer, and joining me on the call today are Steve Beauchamp, and Toby Williams co Ceos Pelosity.

Ryan Glenn: 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.

Ryan Glenn: Factors risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward looking statements.

Ryan Glenn: Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statement. 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 statement.

Ryan Glenn: Also these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward looking statements.

Ryan Glenn: 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.

Ryan Glenn: Also, during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

Ryan Glenn: Also during the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing. These results currently available in our press release, which is located on our website at <unk> Dot com under the Investor Relations tab and filed with the Securities and Exchange Commission.

Ryan Glenn: <unk>.

Ryan Glenn: 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.

Ryan Glenn: In regard to our upcoming conference schedule, I will be attending the Wolf Conference in New York on February 27th, and Toby and I will be attending the Stiefel Executive Summit in Florida in early March and the Raymond James Institutional Investors Conference in Orlando on March 6th. 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.

Ryan Glenn: In regard to our upcoming conference schedule I will be attending the Wolfcamp rinse in New York on February 27th and Toby and I will be attending the Stifel Executive Summit in Florida in early March and the Raymond James Institutional Investors conference in Orlando on March 6th. 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.

Steven R. Beauchamp: Thank you Ryan and thanks to all of you for joining us on our second quarter fiscal 'twenty four earnings call. Our solid results continued in Q2 of fiscal 'twenty four with total revenue growth of 20% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace.

Steven R. Beauchamp: And thanks to all of you for joining us on our second quarter fiscal 24 earnings call. Our solid results continued in Q2 of fiscal 24, with total revenue growth of 20%. As our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace, recurring and other revenue was $298.4 million, or 16% growth over Q2 of last year. We continue to receive positive client feedback on our modern product suite, including newer products such as advanced scheduling, learning management, rewards and recognition, and employee voice. Specifically, a client in the automotive industry with over 1,000 employees highlighted how the ability to create custom recognition awards that are shareable via the mobile app is positively impacting employee sentiment by making it easier for employees to celebrate one another in new ways. Similarly, a retail client with 900 employees has created over 200 custom trainings with our learning management module to better connect employees to the company's vision, mission, and core values.

Steven R. Beauchamp: <unk> and other revenue was $298 4 million or 16% growth over Q2 of last year.

Steven R. Beauchamp: We continue to receive positive client feedback on our modern product suite, including newer products, such as advanced scheduling learning management rewards and recognition and employee voice specifically a client in the automotive industry with over 1000 employees highlighted how the ability to create custom recognition awards that are shareable via the mobile App is positively.

<unk> employee sentiment by making it easier for employees to celebrate one another in new ways. Similarly, a retail client with 900 employees has created over 200 custom trainings with our learning management module to better connect employees to the company's vision mission and core values.

Steven R. Beauchamp: Additionally, we continue to invest in and build upon our AI leadership in the HCM industry with the launch of AI-driven personalized learning plans, optimized workforce schedules, and embedded generative AI recommendations within rewards and recognition, employee voice, and community. Building upon the generative AI-driven announcement and job description released in Community and Recruiting last calendar year, these new features help to further improve business efficiency, communication, and the end-user experience for our clients. While we're pleased with our Q2 results, the macro environment has become increasingly challenging over the last few months as employment levels on the platform once again moderated versus our expectations and presented an incremental headwind to results in the quarter and to fiscal 24 guidance. Despite the macro challenges, we continue to invest in our product suite, and this commitment to product innovation continues to be recognized by third parties, as Paylocity was recently awarded a bronze Brandon Hall Group Excellence in Technology Award I would now like to pass the call to Toby to provide further color on the quarter. Thanks, Steve.

Steven R. Beauchamp: Additionally, we continue to invest and build upon our AI leadership in the HCM industry with the launch of AI, driven personalized learning plans optimized workforce schedules and embedded generative AI recommendation within rewards and recognition employee voice and community.

Steven R. Beauchamp: Building upon the generative AI driven announcement and job description released in community and recruiting last calendar year. These new features helped to further improve business efficiency communication and the end user experience for our clients.

Steven R. Beauchamp: While we're pleased with our Q2 results the macro environment has become increasingly challenging over the last few months as employment levels on the platform once again moderated versus our expectations and presented an incremental headwind to results in the quarter and two fiscal 'twenty four guidance. Despite the macro challenges we continue to invest in our product suite and this commitment to product innovation.

Steven R. Beauchamp: <unk> continues to be recognized by third parties as Pelosity was recently awarded a brand Brandon Hall Group Excellence and Technology Award in the best advance and employee engagement technology category and named as overall leader intent HCM product category in <unk> Winter 2023 grid reports, marking the 20 <unk> consecutive quarter.

Steven R. Beauchamp: And which Pelosity achieved leader ranking I would now like to pass the call to Toby to provide further color on the quarter.

Toby Williams: This is a very busy time of year for all of our teams across the business, as they work closely with clients on year-end processing of payrolls, W-2s, 1095s, and annual tax form filings to federal, state, and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy year-end season. Building on Steve's comments around product innovation, in early December, we announced the acquisition of Trace, which enables organizations to manage headcount plans, forecast headcount budgets, and approve headcount changes. When combined with the valuable employee record data in our platform, we believe Trace's headcount planning capabilities will help our clients improve decision making and drive faster execution. From a financial perspective, Trace will not materially contribute to revenue or impact our overall margin profile in Fiscal 24.

Toby Williams: Thanks, Steve.

Toby Williams: It's a very busy time of year for all of our teams across the business as they work closely with clients on year end processing of payrolls W. Twos, $2 95, and annual tax form filings to federal state and local agencies and on the implementation of new clients I want to thank all of our employees for their hard work and dedication to our clients. During this very busy year end season.

Toby Williams: Building on Steve's comments around product innovation in early December we announced the acquisition of trace which enables organizations to manage head count plans forecast head count budgets and approve head count changes when combined with the valuable employee record data in our platform. We believe traces head count planning capabilities will help our clients improve decision, making and drive.

Toby Williams: Faster execution from a financial perspective trace will not materially contribute to revenue or impact our overall margin profile in fiscal 'twenty four.

Toby Williams: With respect to our go-to-market efforts, we've realized significant success in the upper end of our target market over the last several fiscal years, and we have invested in growing the size of that team. To date in Fiscal 24, we've seen sales cycles upmarket take longer, and it has taken longer for our new reps to ramp up, which has pressured productivity and new sales volumes in January and has weighed on Fiscal 24 growth. That said, we remain confident in our sales team and go-to-market strategy, and we are pleased by our top-of-funnel activity, the growth of the upmarket pipeline, and our ability to drive product differentiation upmarket. We will be focusing the rest of this year and going into next year on driving a higher level of go-to-market productivity and driving execution in the markets.

Toby Williams: With respect to our go to market efforts, we've realized significant success in the upper end of our target market over the last several fiscal years and we've invested to grow the size of that team to date in fiscal 'twenty four we've seen sales cycles up market take longer and it has taken longer for our new reps to ramp up which has pressured productivity and new sales volumes in January and has weighed on <unk>.

Toby Williams: 24 growth that said, we remain confident in our sales team and go to market motion and we are pleased by our top of funnel activity the growth of the upmarket pipeline and our ability to drive product differentiation of market we.

Toby Williams: We will be focusing the rest of this year and going into next year on driving a higher level of go to market productivity and driving execution up market.

Toby Williams: We have remained focused on our referral channels and have been pleased with the consistency of our referrals, which once again delivered more than 25% of our new business in Q2. We have also continued to drive leverage across the business as we grow and scale, with a focus on both EBITDA and free cash flow leverage this quarter and this fiscal year. The strong culture at Paylocity continues to be recognized externally, as we recently were named to Newsweek's America's Greatest Workplaces for Diversity in 2024 and included in the list of the 100 best large companies to work for in Chicago for 2023. I would now like to pass the call to Ryan to review the financial results in detail and provide updated Fiscal 24 guidance. Thanks, Toby.

Toby Williams: We have remained focused on our referral channels and have been pleased with the consistency of our referrals, which once again delivered more than 25% of our new business in Q2.

Toby Williams: We have also continued to drive leverage across the business as we grow and scale with focus on both EBITDA and free cash flow leverage this quarter and this fiscal year the.

Toby Williams: The strong culture at Pelosity continues to be recognized externally as we recently were named to Newsweek's America's greatest workplaces for diversity in 2024 and built ins list of the 100 best large companies to work for in Chicago for 2023, I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 'twenty four.

Toby Williams: Guidance.

Ryan Glenn: Total revenue for the second quarter was $326.4 million, an increase of 20%, with recurring and other revenues up 16% from the same period last year and above the midpoint of our guidance. Our adjusted gross profit was 72.7% for Q2 as we continue to focus on scaling our operational costs while maintaining industry-leading service. We continue to invest in research and development, and to understand our overall investment in R&D, it is important to both combine what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 27% when compared to the second quarter of Fiscal 23, as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities, on a non-gap basis, sales and marketing expenses were 21.3 percent of revenue in the second quarter versus 23.7 percent in the second quarter of last year.

Ryan Glenn: Thanks, Tobey total revenue for the second quarter was $326 4 million, an increase of 20% with recurring and other revenues up 16% from the same period last year and above the midpoint of our guidance. Our adjusted gross profit was 72, 7% for Q2 as we continue to focus on scaling our operational costs, while maintaining industry leading service.

Toby Williams: <unk>.

Toby Williams: We continue to invest in research and development and to understand our overall investment in R&D is important to both combined what we expense and what we capitalize on a dollar basis, our year over year investment in total R&D increased by 27% when compared to the second quarter of fiscal 'twenty three as we continue to build out the pelosity platform to serve the needs of the modern workforce and.

Toby Williams: Regards to our go to market activities on a non-GAAP basis sales and marketing expenses were 21, 3% of revenue in the second quarter versus 23, 7% in the second quarter of last year.

Ryan Glenn: On a non-GAAP basis, G&A costs were 9.1% of revenue in the second quarter versus 11.3% 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 $112.6 million, or 34.5% margin, and exceeded the top end of our guidance by $9.6 million and represented 620 basis points of leverage versus Q2 of fiscal 23 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 $219 million, operating income was $49.7 million, and net income was $38.1 million. In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $366.9 million and no debt outstanding.

On a non-GAAP basis G&A costs were nine 1% of revenue in the second quarter versus 11, 3% in the same period last year and we remain focused on consistently leveraging our G&A expenses on an annual basis.

Toby Williams: Our adjusted EBITDA for the second quarter was $112 6 million or 34, 5% margin and exceeded the top end of our guidance by $9 6 million and represented 620 basis points of leverage versus Q2 of fiscal 'twenty three.

Toby Williams: 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.

Toby Williams: Briefly covering our GAAP results for Q2 gross profit was $219 million operating income was $49 7 million and net income was $38 1 million.

Toby Williams: In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $366 9 million and no debt outstanding.

Toby Williams: In regard to client held funds and interest income our average daily balance of client funds was $2 4 billion in Q2 were.

Ryan Glenn: In regard to client-held funds and interest income, our average daily balance of client funds was $2.4 billion in Q2. We are estimating the average daily balance will be approximately $2.9 billion in Q3, with an average annual yield of approximately 450 basis points. On a full year basis, we're estimating the average daily balance will be approximately $2.5 to $2.6 billion, with an average yield of approximately 445 to 450 basis points. Please note that our guidance includes the impact of a contemplated 25 basis point decline in the Fed Funds Rate in May. In regard to client workforce levels, year-over-year employees on the platform growth came in below our expectations in Q2, resulting in an incremental headwind for the quarter and fiscal year. Given recent macroeconomic trends, our updated guidance for the back half of Fiscal 24 includes further moderation in client workforce levels through the remainder of the fiscal year.

Toby Williams: We are estimating the average daily balance will be approximately $2 9 billion in Q3 with an average annual yield of approximately 450 basis points on a full year basis. We are estimating the average daily balance will be approximately $2 five to $2 6 billion with an average yield of approximately 445 to 450 basis points. Please note our <unk>.

Toby Williams: <unk> includes the impact of a contemplated 25 basis point decline in the fed funds rate in may.

Toby Williams: In regard to client workforce levels year over year employees on the platform growth came in below our expectations in Q2, resulting in an incremental headwind in the quarter and fiscal year given.

Toby Williams: Given recent macroeconomic trends our updated guidance for the back half of fiscal 'twenty. Four includes further moderation in client workforce levels through the remainder of the fiscal year.

Speaker Change: Finally, I'd like to provide our financial guidance for Q3 and full fiscal 'twenty four.

For the third quarter of fiscal 'twenty for total revenue is expected to be in the range of $395 million to $399 million or approximately 17% growth over third quarter of fiscal 'twenty three total revenue.

Ryan Glenn: Finally, I'd like to provide our financial guidance for Q3 and full fiscal 24. For the third quarter of fiscal 24, total revenue is expected to be in the range of 395 to 399 million, or approximately 17% growth over the third quarter of fiscal 23. And adjusted EBITDA is expected to be in the range of $153.5 to $156.5 million. And for fiscal year 24, total revenue is expected to be in the range of $1.384 billion to $1.389 billion, or approximately 18% growth over fiscal 23.

Speaker Change: And adjusted EBITDA is expected to be in the range of 153, five to $156 5 million.

Speaker Change: And for fiscal year 'twenty for total revenue is expected to be in the range of $1 38, 4 billion to 138 9 billion or approximately 18% growth over fiscal 'twenty three.

Speaker Change: And adjusted EBITDA is expected to be in the range of 474 to 478 million, which represents 240 basis points of leverage over fiscal 'twenty three.

Speaker Change: Greater we are now ready for questions.

Speaker Change: Thank you.

Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced.

Speaker Change: To withdraw your question. Please press star one again.

Operator: And adjusted EBITDA is expected to be in the range of $474 to $478 million, which represents 240 basis points of leverage over fiscal 2020. Operator, we are now ready for questions. Thank you. Ladies and gentlemen, as a reminder to ask questions, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again.

Please standby, while we compile the Q&A roster.

Speaker Change: Our first question comes from the line of Scott Berg with Needham Your line is open.

Speaker Change: Hey, guys. This is Josh on for Scott. Thanks for taking our questions just starting off here. What are you seeing in terms of unit growth or any potential churn with customers at the low end of the market. One of your public competitors noted an elevated level of churn with customers under 50 employees.

Speaker Change: Are you seeing anything there or is it really simply just a matter of customers across the board regardless of size lowering their employment levels.

Operator: Please stand by while we compile the Q&A roster. Our first question comes from the line of Scott Berg with Needham. Your line is open. Hey guys, this is Josh on for Scott.

Speaker Change: Thats all customer segments, Yes, I think the impact that we're seeing is our current customers.

Steven R. Beauchamp: Thanks for taking our questions. I'm just starting off here. What are you seeing in terms of unit growth or any potential churn with customers at the low end of the market? One of your public competitors noted an elevated level of customer churn among customers under 50 employees. Uh, are you seeing anything there, or is it really simply just a matter of customers across the board, regardless of size, lowering their employment levels across all customer sectors? Yeah, I think the impact that we're seeing is that our current customers are not necessarily getting the growth of employees on the platform that you would typically see in this type of economic environment. And so we certainly factored that in in terms of what we've seen already this year and then assumed So that's the headwinds that I think Ryan referred to in the script.

Speaker Change: Or not necessarily getting the growth of employees on the platform that you would typically see in this type of economic environment and so we certainly factored that in in terms of what we've seen already this year and then assume that that was going to continue to be the case for the back half of the year. So thats the headwinds that I think Ryan referred to in the script you typically see customers.

Speaker Change: Under 50 employees, they naturally turnover at a higher rate just because there is more out of business losses.

Speaker Change: That trend is probably something that's always been the case in our industry and so.

Speaker Change: If you were growing that segment more than you were losing more of there that probably just as the nature of the business went under 50 market I don't think we've seen anything in that space that would be any different than before.

Steven R. Beauchamp: You typically see customers with under 50 employees; they naturally turn over at a higher rate just because there's more out of business losses. That trend is probably something that's always been the case in our industry. And so if you were growing that segment more, and you were losing more there, that probably just is the nature of the business and the under-50 market. I don't think we've seen anything in that space that would be any different than before. You know, and I think in an economy that's growing and fairly consistent in terms of employment levels, there's nothing to call out. I got it.

Speaker Change: And I think an economy, that's growing and fairly consistent in terms of employment levels.

Speaker Change: Nothing to call out space.

Speaker Change: Got it and then just a follow up.

Speaker Change: Are you seeing is there going to be any year over year headwinds related to <unk> revenue in the March quarter.

Speaker Change: In terms of number of employees that were active on the platform on a year over year basis. Thank you.

Steven R. Beauchamp: And then just to follow up, are you seeing, is there going to be any year-over-year headwinds related to forms revenue in the March quarter in terms of the number of employees that were active on the platform on a year-over-year basis? Thank you. Sure, so I think we obviously, where we are in the quarter, have a good idea of where foreign revenue is trending for Q3, so we've taken that into account as we've guided for Q3 and for fiscal 24.

Speaker Change: Sure. So I think we obviously, where we are in the quarter have a good idea of where form revenue is trending for Q3. So we've taken that into account as we've guided for Q3 and for fiscal 'twenty four.

Speaker Change: Got it thanks guys.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Brad Reback with Stifel. Your line is open.

Toby Williams: Thanks, guys. Thank you. Please stand by for our next question. Our next question comes from the line of Brad Reback with Stiefel. Your line is open.

Brad Reback: Thanks, very much Toby can you spend a couple of minutes reviewing some of your commentary on the sales force close rates up market how much of that you feel is economic versus execution.

Brad Reback: Great, thanks very much. Toby, can you spend a couple of minutes reviewing some of your commentary on the sales force, the close rates, upmarket, and how much of that you feel is economic versus execution? Thanks. Yeah, sure. Thanks, Brad.

Brad Reback: <unk>.

Toby Williams: Yes, sure Thanks, Brad Yes.

Speaker Change: Yes, I think if you if you go back over probably the last.

Toby Williams: And yeah, I think if you go back over the last, call it 18 months to two years, we've talked about getting traction in the market, and we've talked about having incremental success there from a sales perspective, and I think that's been the case. And I think we've also invested more across the business in Engoda Market to support the growth that we've seen there. And as we've called out, I think last quarter, we called out that we were seeing slightly slower sales cycles. I think we saw the same thing this quarter, and I think that was the reason why we put it in the script. I think it's hard to take apart with any precision what part of that is attributable to the macro, because I know others in the space have talked about this too, and you've on and off heard it in the broader software category in terms of up-market sales cycles being longer. It's hard to take apart how much of that is attributable to the macro.

Toby Williams: Call. It 18 months to two years, we've talked about getting.

Toby Williams: Traction upmarket and we've talked about having incremental success there from a from a sales perspective, and I think thats been the case and I think we've also invested more across the business and in go to market to support the growth that we've seen there.

Toby Williams: And as we've called out I think last quarter.

Toby Williams: We called out that we were seeing slightly slower sales cycles. I think we saw the same thing this quarter and I think that was the reason why we put it in the script I think it's hard to take apart.

Toby Williams: With with any precision what part of that because I know others in the space have talked about this to an <unk> on and offered it in the broader software category in terms of upmarket sales cycles being longer it's hard to take apart.

Toby Williams: How much of that is attributable to the macro I don't think the macro helps.

Toby Williams: I don't think the macro helps, but I think part of it is, as we've..., sort of gotten further and further into the up market. I think we certainly have an opportunity to execute better. And I think that will be a focus as we look at the rest of this fiscal year to be able to drive productivity, and I think that'll carry into next fiscal year, too. I think the only thing I would add to that, Brad, is that one of the things that we are seeing is a pretty nice build in the pipeline market. We didn't see all that come through in January and obviously had to factor that into the guidance. But we definitely see a fair amount of activity there.

Toby Williams: But I think part of it is I think as we've sort of gotten further and further into the upmarket I think we.

Toby Williams: Certainly have an opportunity to execute better and I think that that will be a focus as we look at the rest of this fiscal year to be able to drive productivity and I think that will carry into next fiscal two I think the only thing I would add to that Brad is.

Speaker Change: One of the things that we are seeing is a pretty nice build in the pipeline up market. We didn't see all that come through in January and obviously you have to factor that into the guidance.

Speaker Change: But we definitely see a fair amount of activity there and so that is certainly.

Steven R. Beauchamp: And so that certainly, you know, allows us to remain optimistic about the success in the market in terms of the clients that we're selling, the response we're getting from prospects in the market, and the opportunity going forward. And can you just remind us what an up market means for you? Is that north of 500 north of 1000?

Speaker Change: Allows us to remain optimistic about the success in the market in terms of the clients that we're selling the response, we're getting from prospects in the market and the opportunity going forward.

Speaker Change: And can you just remind us what a market means for you is that north of 500 north of a thousand. Thanks, Yeah, I would say, it's north of 500 employees would be how we define that kind of internally.

Toby Williams: Yeah, I would say it's north of 500 employees. That's how we define that kind of internally. Yep. Great. Thanks very much.

Speaker Change: Yes.

Speaker Change: Great. Thanks very much.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samena with Jeff Rhee. Your line is open.

Speaker Change: Yes. Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of <unk> <unk> with Jefferies. Your line is open.

Operator: Hi, good evening, thanks for sharing my questions. Maybe the first one, maybe to piggyback on Brad's question about the upmarket, does it make you think that you need a different type of sales rep, or, I guess, can you help us understand maybe what has made it more difficult for them to be able to sell? And do you need to hire different types of reps there than is historically done in the core sales organization? Maybe walk us through that.

Jefferies: Hi, Good evening, Thanks for taking my question, maybe first one.

Jefferies: Maybe to piggyback on Brad's question about the market does it make you think that you need a different type of either sales ramp or.

Jefferies: Can you help us understand.

unknown: Maybe what has made it more difficult for that is going to be able to ramp.

unknown: You need to hire different types of reps. There that you can start with that and of course sales organization, maybe walk us through that.

Steven R. Beauchamp: Yeah, I think it's a good question. So we've been ramping up the number of reps in that space, as Toby just mentioned, faster than the rest of our sales force over the last, like, two to three years. We've called out the fact that success in that market has been a tailwind for us over the last couple fiscal years. Early on in that cycle, you get a lot of promotions from within. It's very common to be able to do that as you start to ramp up to bigger numbers, and you're certainly bringing more people in from the outside. So I think part of this is figuring out how long it takes someone to ramp from the outside versus the internal.

Speaker Change: I think it's a good question. So we've been ramping the number of reps in that space as Toby just mentioned faster than the rest of our sales force over the last call. It two to three years.

We've called out the fact that success in that market has been a tailwind for us over the last couple of fiscal years early on in that cycle, you get a lot of promotions from within it's very common to be able to do that as you start to ramp to bigger numbers youre certainly, bringing more people in from the outside so I think part of this is figuring out how long does it take someone to ramp from the outside versus internal and then I think.

Steven R. Beauchamp: And then I think secondly, when you start to get higher volumes of deals in that space, trying to understand what those sales cycles look like and the decision-making cycle. So there certainly is a little bit of learning at scale that's going on here. But I would reiterate the fact that, you know, we've had a lot of success, it's been a tailwind for us over the last couple years, a little bumpier here in the first half of this year, but the pipeline looks pretty rich and strong. And we think we know what we have to do to continue to have success in that market going forward. Great

Speaker Change: Secondly, when you start to get higher volume of deals in that space trying to understand what those sales cycles look like and the decision making cycle. So there is certainly is a little bit of learning at scale, that's going on here.

Speaker Change: But I would reiterate the fact that we've had a lot of success, it's been a tailwind for us over the last couple of years Little Bumpier here on the first half of this year, but the pipeline looks pretty rich and strong and we think we know what we have to do to continue to get success in that market going forward.

Ryan Glenn: Maybe just a follow-up for Ryan, because I think about the guidance, how much of it was maybe the sluggishness that you've seen upmarket versus the trend in employment in the base coming in differently than expectations? And just as I think about the exit rate, and what that implies, is that kind of a fair way to think about the growth rate going forward, at least for the short term? Yeah, I think when you think about the revised guidance for this fiscal year, I think it's absolutely a combination of what Steve and Toby have referenced relative to sales execution. So that's certainly part of it.

Speaker Change: Great and maybe just a follow up for Brian because I think about the guidance.

Speaker Change: How much of it was maybe the sluggishness that you've seen.

Speaker Change: <unk> versus the trend in employment in the base.

Speaker Change: Coming in differently than expectation.

Brian: So as I think about the exit rate and what that implies is that kind of a fair way to think about that growth rate going forward at least for the short term.

Yes, I think when you when you think about the revised guidance for this fiscal year I think it's absolutely a combination of what Stephen Tobey Ive referenced relative to sales execution. So that's certainly part of it and I think equal part of it has been some of the challenges we've seen from a macro standpoint, both year to date as well as the fact that we factored in some.

Ryan Glenn: And I think an equal part of it has been some of the challenges we've seen from a macro standpoint, both year to date, as well as the fact that we factored in some further moderation in the back half of the year. So I think both of those contributed fairly equally to the revised guidance, relative to what that implies for Q4. Obviously, as I referenced, we have some further moderation in employment levels that puts you in the sort of 13% or so range for exit of Q4. And I think, you know, we'll see how the back half of the year goes before we guide more specifically into 25. Great. As always, I appreciate the time.

Brian: Further moderation in the back half of the year. So I think both of those contributed fairly equally to the revised guidance relative to what that implies for Q4, obviously as I referenced we have some further.

Brian: Moderation in employment levels that puts you in the sort of 13% or so range for exited Q4 and I think.

Brian: We'll see how the back half of the year goes before we guide more specifically into 'twenty five.

Speaker Change: Great as always I appreciate it thank you.

Pat Walravens: Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Pat Walravens. On behalf of J&P Securities, your line is open.

Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Pet Wall Ravens with.

Speaker Change: With JMP Securities. Your line is open.

Steven R. Beauchamp: Oh, great. Thanks very much. Steve and Toby, I'm wondering how deeply you analyze employees that are on the... Did you break it out internally for yourselves, you know, by industry, or did you break it out by geography? We break it out by segment. And I, you know, because UKG started disclosing that, and they're private, so they can do it. I assume you guys have that level of detail, too. And I'm just wondering, where was the weekend?

Speaker Change: Oh, great. Thanks very much.

Speaker Change: Steve and Toby I'm wondering how deeply do you analyze that.

Speaker Change: <unk> of the employees that are.

Speaker Change: On the system I mean, do you break it out entirely for yourselves by industry could you break it out by Geo.

Speaker Change: You break it out by segment.

Speaker Change: Sure.

Speaker Change: You take U K G started disclosing that in their private so they can do it right, but sure I assume you guys have that level of detail too and I'm, just wondering where was the weakness.

Steven R. Beauchamp: So we do all those things, and we look at it a variety of different ways. I would tell you that there wasn't a big spike in a specific geography or a specific vertical market. I think your higher hourly employee segments, when you think of vertical markets, we saw a little bit higher decline in those segments if you think of vertical markets. For geographies, there really wasn't much of a call out at all.

Speaker Change: So we do all of those things and we look at it a variety of different ways I would tell you that not.

Speaker Change: So there wasn't a big spike in a specific geo or specific vertical market I think your higher hourly employee segments. When you think of vertical markets, we saw a little bit higher a decline in those segments. If you think of vertical markets Geos, there really wasn't much of a call out at all.

Steven R. Beauchamp: And so it was generally kind of across the board, just a little bit of weakness, but when you add that up across all the customers that we have, and you factor that in, it starts to have an impact, especially when it happened month after month this fiscal year. So this is a tough follow-up, I know. So this is two quarters in a row that you think it happened.

Speaker Change: And so it was generally kind of across the board.

Speaker Change: Just a little bit of weakness, but when you add that up across all the customers that we have.

Speaker Change: And you factor that in it starts to have an impact, especially when it's happened month after month this fiscal year.

Speaker Change: And so this is a tough follow up I know, but.

Speaker Change: This is two quarters in a row, you think it happens again.

Terry Tillman: We factored into our guidance that the trend that we've seen in the last two quarters would continue through the back half of the year. Okay, great. Thank you. Thank you. Our next question comes from the line of Terry Tillman with Truworth Securities. Your line is open.

Speaker Change: We factored into our guidance that the trend that we've seen in the last two quarters would continue through the back half of the year.

Speaker Change: Okay, great. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Terry Tillman with <unk> Securities. Your line is open.

Steven R. Beauchamp: Yeah, thanks for taking my questions. I had a question to follow up on, just kind of building on the last couple questions. I think you guys are articulating that there might be some macro stuff here, but also execution stuff. Could you share a little bit more how you're thinking about, with a couple quarters left, what you can do on the execution side, whether it's organizational or leadership changes? And then the second question, maybe if I could just go ahead and ask it, and I can repeat it if y'all forget, is have y'all maybe over-indexed on the upmarket activity? Because there are lots of smaller employers under 500 employees.

Terry Tillman: Yes, Thanks for taking my questions I had a question on a follow up just kind of building on the last couple of questions. I think you guys are articulating that there might be some macro stuff here, but also execution stuff could you share a little bit more how you're thinking about with a couple of quarters left what you can do on the execution side, whether it's org our leadership changes.

Terry Tillman: And then the second question, maybe if I could just go ahead and ask it and I can repeat it all forget is have you all may be over indexed.

Terry Tillman: Market activity because there is lots of smaller employers under 500 employees is there any way I know, it's easier said than done.

Steven R. Beauchamp: Is there any way, I know it's easier said than done, to make a bit of a pivot to that market, or is that market just less active? Thank you. So, I think what I would say is I don't think we need any major structural changes. I think we've got the team in place. When we look at what we've got from a pipeline perspective, and we look at all of our internal metrics, we feel pretty confident that the ability to execute sits in front of us. Big market, great product in terms of receptivity. And so we feel pretty good about that. We have grown pretty fast, to your second question, in the upmarket. Maybe hindsight's 20-20.

Terry Tillman: A bit of a pivot to that market or is that market is just less.

Speaker Change: Thank you.

Speaker Change: I think what I would say is I don't think we need any major structural changes I think we've got the team in place when we look at what we've got from a pipeline perspective, and we look at all of our internal metrics, we feel pretty confident that.

Speaker Change: The ability to execute sits in front of us big market, great product in terms of receptivity.

Speaker Change: And so we feel pretty good about that.

Speaker Change: We have grown pretty fast to your second question and upmarket maybe hindsight 2020, it's hard to say that's been a great tailwind for us over the last two or three fiscal years, so hard to actually say that wasn't successful did it create some bumps in the road maybe early on in this fiscal year, yes, but you know the.

Steven R. Beauchamp: It's hard to say. That's been a great tailwind for us over the last two or three fiscal years, so hard to actually say that it wasn't successful. Did it create some bumps in the road, maybe early on in this fiscal year? Yes. But the product is being received really well in the marketplace, and the pipeline is really, really strong. We've got a great group of people that we feel like have been productive and will continue to be productive, and we've got to focus on execution in terms of what's in front of us. Yeah, I got it.

Speaker Change: The product is being received really well in the marketplace. The pipeline is really really strong.

Speaker Change: Got a great group of people that we feel like have been productive and we will continue to be productive and we focus on execution in terms of what's in front of us.

Steven R. Beauchamp: But just Steve, just a real quick kind of follow up, because one thing you did note is the pipeline. I mean, if these deals are closing, they just stay in the pipeline. I'm just curious, do these folks still, at some point, just kind of flow down or just cut it off? And then you have to kind of, you know, get in a new sales cycle with them the next year? Or could some of these larger deals actually play out?

Speaker Change: Got it Thats just a real quick kind of follow up because one thing you didn't notice the pipeline I mean, if these deals are closing that they just stay in the pipeline I'm. Just curious do these folks though at some point just kind of.

Speaker Change: Slowdown or just cut it off and then you have to kind of get into the new sales cycle with them in the next year or could some of these larger deals actually play out.

Steven R. Beauchamp: in the next couple of quarters. I'm just trying to understand how some of the larger deals could potentially play out because this is a newer business for you, so maybe you don't have pattern recognition.

Speaker Change: In the next couple of quarters I'm, just trying to understand how some of these larger deals could potentially play out because this is the neuro business for you. So maybe you don't have pattern recognition. Thank you sure no. It's a fair question I think we've been in this space for a while but really more in the last three fiscal years kind of an earnings where we've been expanding more significantly and as I mentioned earlier.

Steven R. Beauchamp: Thank you. Sure. No, it's a fair question.

Steven R. Beauchamp: I think we've been in this space for a while, but really, the last three fiscal years have been kind of in earnest where we've been expanding more significantly. And as I mentioned earlier, you know, we've ramped up the reps up more significantly over the last two years, with more hires from outside of the industry. So we do continue to learn. I think you will see many people in this space talk about elongated sales cycles. So I think there's a macro element to that.

Speaker Change: We've ramped that wraps up more significantly over probably the last two years with more hires from outside of the industry. So we do continue to learn.

Speaker Change: You see many people in this space talk about elongated sales cycles. So I think there's a macro element to that that's certainly the feedback that we hear from our reps, which is just taking a little bit longer to get the decisions. We look at both top of funnel pipeline as well as late stage pipeline and we see pretty strong activity all the way through so that gives us confidence that we've got an opportunity.

Steven R. Beauchamp: That's certainly the feedback that we hear from our reps, which is just taking a little bit longer to get the decisions. We look at both top of funnel pipeline as well as late stage pipeline, and we see pretty strong activity all the way through. So that gives us confidence that we've got an opportunity to be able to push some of those deals through in the back half of the year and have a better back half than we did in the front half of the year. Okay, thank you. Thank you.

Speaker Change: To be able to push some of those deals through in the back half of the year and have a better back half than we did on the front half upmarket.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Brian Peterson with Raymond James Your line is open.

Brian Peterson: Hey, Thanks, two quick ones for me, so given what youre seeing in terms of the sales cycles in the productivity ramping does that change your plan on sales hiring at least for fiscal year 'twenty four and how we're thinking about fiscal year 'twenty.

Bryan Peterson: Please stand by for our next question. Our next question comes from the line of Bryan Peterson with Raymond James. Your line is open. Hey, thanks guys. Two quick ones for me.

Brian Peterson: Yes. So I think we got this question last quarter in terms of how we think about adding per segment and I think the last couple of times, we would say it's much more even so we're not adding more in the upper end of the market relative to our core marketplace and so we've already kind of made that shift.

Steven R. Beauchamp: So given what you're seeing in terms of the sales cycles in the productivity ramping, does that change your plan on sales hiring, at least for fiscal year 24 and how we're thinking about fiscal year 25? Yeah, so I think we got this question last quarter in terms of how we think about adding employees per segment. And I think the last couple times, we would say it's much more even.

Brian Peterson: I think theres, an opportunity for us to be able to put we're focused on an absolute new IRR number versus a specific number of reps and if we have an opportunity to press on productivity to be able to get there. We always go there first that's always kind of our thought process.

Steven R. Beauchamp: So we're not adding more in the upper end of the market relative to our core marketplace. And so we've already kind of made that shift. I think there's an opportunity for us to be able to, we're focused on an absolute new ARR number versus a specific number of reps. And if we have an opportunity to press on productivity to be able to get there, we always go there first. That's always kind of our thought process.

Brian Peterson: So we will make that decision until we go into next fiscal year, but I would say, we feel pretty good about the staffing level that we've got right now we feel good about the initiatives that we have to drive productivity and will give you more color as we kind of go into the next fiscal year.

Speaker Change: And Ryan I am sorry, if I missed this but any help on how to think about interest rate implications and the updated guidance. Thanks guys.

Steven R. Beauchamp: So we won't make that decision until we go into the next fiscal year. But I would say we feel pretty good about the staffing level that we've got right now, we feel good about the initiatives that we have to drive productivity, and we'll give you more color as we kind of go into the next fiscal year. Understandable. And Ryan, I'm sorry if I missed this, but any help on how to think about interest rate implications in the updated guidance? Thanks.

Ryan Glenn: Sure. So in the prepared remarks, I went through and gave you average daily balance and yield assumptions I think we did bake in a contemplated 25 basis point fed funds cut in may the impact of that to the fiscal year, obviously very in the middle of the fourth quarter, So muted impact, but it's probably about $1 million or so impact to Q4.

Ryan Glenn: Sure, so in the prepared remarks that I went through and gave you, average daily balance and yield assumptions, I think we did bake in a contemplated 25 basis point Fed funds cut in May. The impact of that on the fiscal year, obviously, very, you know, in the middle of the fourth quarter, so a muted impact, but it's probably about a million dollars or so impact on Q4, and that's factored in the guidance. Thank you. Thank you.

Ryan Glenn: And that's factored into guidance.

Ryan Glenn: Yes.

Speaker Change: Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Mark Mccollom with Baird. Your line is open.

Mark S. Marcon: Hey, good afternoon guys.

Mark S. Marcon: Just wanted to follow up.

Mark S. Marcon: Same kind of line of questioning some of the others, but maybe a slightly different way.

Mark S. Marcon: Please stand by for our next question. Our next question comes from the line of Mark Marcon with Baird. Your line is open. Hey, good afternoon, guys.

Mark S. Marcon: With regards to the employment trends that youre seeing.

Mark S. Marcon: Thanks for narrowing it down to the hourly employees in some of our clients.

Steven R. Beauchamp: I want to follow up. The same kind of line of questioning as some of the others, but maybe in a slightly different way. With regard to the employment trends that you're seeing, and thanks for narrowing it down to the hourly employees, some of the clients. In the last couple of quarters, we were talking about employment trends kind of being flat year over year. Are you actually seeing them decline on a year-over-year basis now? We're not seeing them decline yet.

Mark S. Marcon: The last couple of quarters, we were talking about employment trends kind of being flat year over year are you actually seeing them decline on a year over year basis now.

Mark S. Marcon: We're not seeing and seeing them decline yet year over year. There is still actually up a touch in the first half of the year, but we're certainly seeing softness on a sequential basis. So when you think about what we saw in the first quarter and called back called that out last quarter and what we've seen in October through December we are seeing some of that sequential flatness. So they still they are still are up in the.

Steven R. Beauchamp: They're still actually up a touch in the first half of the year, but we're certainly seeing softness on a sequential basis. So when we think about what we saw in the first quarter and called that out last quarter and what we've seen in October through December, we are seeing some of that sequential flatness. So they are still up in the first half, but I think if this trend continues, they will certainly turn negative in the back half of the fiscal year on a year-over-year basis. And that's what you're expecting.

Mark S. Marcon: First half, but I think if this trend continues they will certainly turn negative in the back half of the fiscal year on a year over year basis.

Speaker Change: And that's what you were expecting.

Speaker Change: That is what we have factored into guidance yet based on the fact that we've now seen several months of sequential trend down.

Steven R. Beauchamp: That is what we have factored into guidance, yes, based on the fact that we've now seen several months of the sequential trend down. And then with regard to the elongated sales cycles, obviously that always occurs when there are macro challenges. If employment is trending down, then that would imply that, but I'm wondering if there are any other factors aside from the macro and, also, you know, maybe some sales execution. In other words

Speaker Change: Okay, and then with regards to the elongated sales cycles, obviously that always occurs when.

Speaker Change: There's macro challenges.

Speaker Change: Employment is trending down and that would imply that but I'm wondering are there any other factors aside from the macro.

Speaker Change: And also maybe some sales execution in other words.

Steven R. Beauchamp: If you talk to your more experienced sales folks, and if some of them are, you know, not performing as well as they used to, are you hearing any feedback with regard to, hey, maybe the level of urgency to modernize the solution isn't quite what it was, say, three, four, or five years ago, because, you know, there's a greater percentage of clients that have moved to more modern solutions? And most of the large legacy players have become better and have improved their solutions. In other words, is switching to Paylocity as compelling as it used to be? Yeah, so I have not heard that.

Speaker Change: Yes.

Speaker Change: If you talk to your more experienced sales folks and some of them are.

Speaker Change: Not performing as well as they previously had are you hearing any feedback with regards to maybe the level of urgency.

Speaker Change: Modernize the solution isn't quite what it was say 345 years ago because.

Speaker Change: There is a greater percentage of clients that have moved to more modern solutions and most of the large legacy players have become better and have improved their solution in other words.

Speaker Change: Switching to pay lost city as compelling as it used to be.

Yes, so I have not heard that we've had a lot of conversations with our teams internally and many of our top reps.

Steven R. Beauchamp: We've had a lot of conversations with our teams internally and many of our top reps. It comes down to more decision makers involved, more stage gate processes that they've got to be able to do to get things across the finish line, a little bit of delay in that decision making process. That's the kind of stuff that comes up. We haven't necessarily seen maybe a different competitive environment that's caused that. It just seems to be on the elongated sales cycle comment, more driven by the prospect. Okay, great.

Speaker Change: If more comes down to more decision makers involved more stage gate processes that they've got to be able to do to get things.

Speaker Change: Across the finish line a little bit of delay in that decision, making process. That's the kind of stuff that comes up we haven't necessarily seen maybe a different competitive environment. That's caused that it just it seems to be on the elongated sales cycle comment more driven by the prospects.

Toby Williams: And then are you seeing any change in behavior in terms of the number of either upsells in terms of modules or for new logos, the number of modules that they want to take on? Hey, Mark, no, I don't think we've seen any change in that. I think we've been fairly steady in terms of take rates for new logos. And I think, you know, probably just add on to that, you know, we've added a significant amount of product over the course of the last year or so. And I think we've been, overall, fairly happy, not just with the differentiation that that's helped us continue, but with the attach rates that we've seen in some of the newer products, almost all of which are in the early stage yet still, but I think we've been pleased with what we've seen so far. Great, thank you.

Speaker Change: Okay, Great and then are you seeing any any change in behavior in terms of the number of either up sells in terms of modules or for new logos number of modules that they want to take on.

Speaker Change: Hey, Mark No I don't think we've seen any change in that I mean, I think it was.

Mark S. Marcon: Then fairly steady in terms of take rates for for new logos and I think.

Speaker Change: Just add onto that we've added a significant amount of product over the course of the last year or so and I think we've been overall fairly happy not just with the differentiation that that's helped us continue but.

Speaker Change: With the with the attach rates that we've seen in some of the newer products.

Speaker Change: Most all of which are in early stage, yet still but I think we've been pleased with what we've seen so far.

Jared Levine: Thank you. Please stand by for our next question. Our next question comes from the line of Jared Levine with TVCOLOR. Your line is open.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Okay.

Our next question comes from the line of Jared Levine with T. D. Cohen Your line is open.

Steven R. Beauchamp: Thank you. How did this January's review retention compare year on year? Even if it was consistent, were there any underlying changes based on employer size segment or controllable versus uncontrollable churn? Yeah, so I think we really kind of give more of an update at the end of the year from a retention perspective. You know, that was not something that we called out in the script.

Jared Levine: Thank you how did this January revenue retention compare year on year, even with consistent where there any underlying change just based on employer size segment, our controllable versus uncontrollable churn.

Jared Levine: Yes, so I think we really kind of give more of an update at the end of the year from a retention perspective.

Jared Levine: It was not something that we called out in the script I think we see fairly consistent performance. There. We did call out historically, everybody was kind of seen record high retention after right. After COVID-19 people definitely didn't seem to be moving quite as much and we've certainly seen that return back to the pre COVID-19 levels, but I don't think theres any specific call out from a retention perspective.

Steven R. Beauchamp: You know, I think we see fairly consistent performance there. We did call out historically that everybody was kind of seeing record high retention right after COVID. People definitely didn't seem to be moving quite as much.

Steven R. Beauchamp: And we've certainly seen that return back to pre-COVID levels, but I don't think there's any specific call out from a retention perspective. How would you anticipate the price you charge for your payroll software to change over the medium term, if at all? Does increasing access to payroll offerings through solutions such as embedded payroll represent a threat to pricing power? I don't think we've seen that competitively in the market really at all, particularly in the market that we serve. You know, and when you start to get to slightly larger client sizes in the very micro, small market, you might see more activity of that there. That's probably not a place we play in as much.

Speaker Change: Got it and then how would you anticipate the price you charge for your payroll software to change over the medium term if at all does the increasing access to payroll offerings through solutions, such as embedded payroll represent a threat to pricing power.

Speaker Change: I don't think we've seen that competitively in the market really at all particularly in the market that we serve.

Speaker Change: And you start to get to slightly larger client size and the very micro small market you might see more activity if that there thats probably not a place we play in as much.

Jared Levine: So no, we don't see that as necessarily a problem. Great, thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Ramo Linschow with Barclays. Your line is open. Hey, thanks for squeezing me in.

Speaker Change: So know that we don't see that as necessarily a factor.

Great. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Our next question comes from the line of <unk> with Barclays. Your line is open.

Ramo Linschow: I had two quick questions. You changed your full-year guidance on the revenue side a little bit, but EBITDA stayed the same. Can you talk a little bit about the action you are taking there to protect the profitability there? And then I have one follow-up.

Barclays: Hey, Thanks for squeezing me in two quick questions and you've changed your full year guidance on the revenue side, a little bit but EBITDA.

Barclays: <unk> can you talk a little bit about the actions you're taking there to protect the profitability. There and then I had one follow up thank you.

Ryan Glenn: Sure, I think, so I certainly feel good about where we've driven profitability so far this fiscal year. So in the second quarter, over 600 basis points of leverage on adjusted EBITDA, 470 basis points if you strip out the impact of interest income. So we have a number of programs across the business from an efficiency and scalability perspective, reducing manual processes and making sure that we're really prioritizing spend and continue to be pleased with the output of those programs. And I think that has allowed us, in a maybe more challenging year from a revenue standpoint, to be able to maintain really strong profitability and, in fact, actually take up margin for the fiscal year. So I am really happy.

Speaker Change: Sure I think so I certainly feel good about where we have driven profitability. So far this fiscal year, so second quarter over 600 basis points of leverage on adjusted EBITDA.

Speaker Change: 470 basis points, if you strip out the impact of interest income. So we have a number of programs across the business from a efficiency and scalability perspective, reducing manual processes and making sure that we're really prioritizing spending continued to be pleased with the output of those programs and I think that has allowed us in a maybe more challenging.

Speaker Change: From a revenue standpoint to be able to maintain really strong profitability in fact actually take up margin for the fiscal year. So really happy I think it just demonstrates the scalability and profitability of the business and we've seen that both in adjusted EBITDA as well as in free cash flow.

Steven R. Beauchamp: I think it just demonstrates the scalability and profitability of the business. And we've seen that both in adjusted EBITDA as well as in free cash flow. Okay, perfect, and the follow-up was, you kind of mentioned in the script and in the prepared remarks your leading position on the AI side, like how does that play out, and how do you see the maturity of that solution, and how does it play out in sales cycles already? Is that already a differentiator? Where are clients in terms of understanding? Thank you. Yeah, it's a good question.

Speaker Change: Okay. If I can follow up on you kind of mentioned in the script in the prepared remarks.

Speaker Change: You were leading position on the AI side.

Speaker Change: How does it play out.

Speaker Change: How do you see the maturity of that solution and how does it play out in sales cycles already is that already a differentiator with our clients in terms of understanding. Thank you.

Steven R. Beauchamp: I think we're still very much in the early innings, and I think customers are also trying to figure out how, on an HCM platform AI can provide them with benefits. And so we've often been first to market with many of the AI capabilities. And we're definitely seeing clients use them, and you get, you know, tying into the LLMs and having writing assistants and job descriptions in community. You have a much better option for personalization across the platform, and it's easier to create recommendations based off your historical data set. Think about that, like the schedule recommendations that we've launched.

Speaker Change: Yes, it's a good question I think we're still very much in the early innings and I think customers are also themselves trying to figure out how in an HCM platform AI can provide them benefit and so we've been often first to market with many of the AI capabilities.

Speaker Change: We're definitely seeing clients to use it and you get.

Speaker Change: Tying into the <unk> and having writing assistance and job descriptions and community you have a much better option for personalization across the platform easier to create recommendations based off your historical dataset think about that like schedule recommendations that we've launched and.

Steven R. Beauchamp: And we've got a long list of ideas that we can enhance, you know, customer value in terms of adding AI across the platform. So that continues to be our approach versus any type of separate monetization by SKU. Also, I think there's a big opportunity to really enhance the client experience. You know, clients do call and email, and we interact with them a ton. There are a lot of different questions and answers.

Speaker Change: And we've got a long list of ideas that we can enhance.

Speaker Change: Customer value in terms of adding AI across the platform. So that continues to be our approach versus any type of separate monetization by SKU also think theres, a big opportunity to really enhance the client experience clients do call and E mail and we interact with the <unk>, there's a lot of different questions and answers and so that's an area that we continue to invest in as well as being able to provide.

Steven R. Beauchamp: And so that's an area that we continue to invest in as well as being able to provide much better, more personalized responses to our customers over time. And so I think we've got opportunities in both categories. Thank you. Please stand by for our next question. Our next question comes from the line of City with Missouho. Your line is open.

Speaker Change: <unk> much better and more personalized responses to our customers over time, and so I think we've got opportunities in both categories.

Speaker Change: Okay. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of city with Mizuho. Your line is open.

City: Thanks for taking my question. If I look at your Q2 recurring and other revenue on a seasonality basis, like it only grew 2% sequentially, versus last year, it was like 4.5%. But the way you are guiding for Q3, 22%, which is the same as last year. So did you see any kind of dales or go live that got pushed to Q3?

City: Thanks for taking my question I wanted to ask you about your Q3 guidance if I look at your Q2 recurring and other revenue seasonality we assessed.

Mizuho: It only grew 2% sequentially and versus last year. It was like 45%, but the way you are guiding for Q3, 22%, which is like same as last year. So did you see any kind of deals that go live that got pushed to Q Q3 or are you seeing any kind of late.

Ryan Glenn: Or are you seeing any kind of revenue contribution, maybe from TRES? Basically, I want to understand your confidence level with this guidance for Q3. Yeah, nothing that I'd call out as far as one time or any material movement in deals. I think Toby, you know, went through in his prepared remarks some of the challenges relative to January starts that we saw upmarket. We would have taken that into account and, obviously, you know, being on February 8th, we've got a good sense of January starts and form revenue as well. So we would take all that into account as we guide for Q3. So feel good about that guidance, but nothing I would call out as far as one-time in nature or, you know, specific movements within the months or quarters that would have impacted that. In the trace, what kind of revenue contribution do you expect from the trace acquisition? immaterial to the year, so it has no impact on guidance.

Mizuho: Revenue contribution maybe from Chris.

Speaker Change: Basically I wanted to understand your confidence level with this guidance for Q3.

Speaker Change: Yes, nothing that I'd call out as far as one time or any material movement in deals I think tobey.

Speaker Change: Went through in his prepared remarks, some of the challenges relative to January starts that we saw a market. We would have taken that into account and obviously being on February 8th We've got a good sense of January starts inform revenue as well. So we're able to take all that into into account as we got into Q3. So feel good about that guidance, but nothing I would call out as far as onetime in nature or.

Speaker Change: Specific movements within the months or quarters that would have impacted that.

Speaker Change: And the press.

Speaker Change: What kind of revenue contribution you expect from <unk> acquisition.

Speaker Change: Immaterial to the year, so has no impact on guidance.

Ryan Glenn: Great, thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Steve Enders with Citi. Your line is open.

Speaker Change: Great. Thank you.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from Milan, with Steve Enders with Citi. Your line is open.

Steve Enders: Thanks for taking the questions here. If we were just to start maybe following up on the kind of seasonality dynamics for, you know, 3Q into 4Q, it still kind of assumes another three or four points down on the recurring overall growth line. So, maybe you could just give a little bit more detail on maybe what's different in the assumptions for 4Q versus 3Q and, you know, kind of the delta in the growth rates between the two quarters? Sure, I think probably the two factors I'd call out would be, obviously, January starts, which we've referenced in the prepared remarks and in the Q&A here, so that probably had some headwinds in it relative to up And the other factor would be the macro impact.

Milan: Okay, great. Thanks, Thanks for taking the questions here.

Milan: Maybe just to start maybe follow up on the kind of seasonality dynamics for <unk> in the <unk>.

Steve Enders: <unk> still kind of assumes another three or four points down on the recurring.

Steve Enders: Recurring and overall growth line. So I guess, maybe can you just give a little bit more detail on maybe what's different in the assumptions for the.

Steve Enders: First three exceeded any.

Steve Enders: Yes.

Steve Enders: The Delta.

Steve Enders: And the growth rates between the two quarters.

Speaker Change: Sure I think probably the two factors I'd call out would be obviously January starts, which we've referenced in the <unk>.

Prepared remarks, and the Q&A here, so that probably had some headwinds.

Speaker Change: Relative to up market. So that is a factor in.

Speaker Change: In the third quarter, but certainly into the fourth and the other factor would be the macro impact. So as we've referenced we did see now really two quarters of weakness sequentially and we assumed some further moderation in the back half. So that has an impact in Q3, but as you get to the fourth quarter that would have all of the impact we've seen year to date as well as the additional moderation that we factored in.

Ryan Glenn: So, as we've referenced, we did not really see two quarters of weakness sequentially, and we assumed some further moderation in the back half, so that has an impact on Q3, but as you get to the fourth quarter, that would have all the impact we've seen year-to-date as well as the additional moderation that we factored in. So I think it's really those two items that would account for that sequential slowdown in revenue growth through reference. Okay, all right, that's helpful.

Speaker Change: I think it's really those two items that would account for that sequential slowdown in revenue growth you're referencing.

Speaker Change: Okay, Alright, that's helpful and then maybe just on <unk>.

Steven R. Beauchamp: And then maybe just on the conservatism you have kind of baked into the guy, like, any change in how you're, you know, thinking about the level of conservatism that's now being kind of attained here? Yeah, I don't think there's a change in any guidance philosophy. I think it's a matter of how long you see a trend and then do you have to account for it? So I think last quarter, we kind of assumed employment stayed flat and that you wouldn't see any continued sequential decline. We've seen that now for two quarters.

Speaker Change: Yes.

Speaker Change: The conservatism that you have.

Speaker Change: Baked into the guide like any change in how you're thinking about the level of conservatism, that's now being kind of the same tier.

Speaker Change: Yes, I don't think Theres a change in any guidance philosophy I think it's a matter of how long do you see a trend and then do you have to account for it. So I think last quarter, we kind of assumed employment stayed flat and that you wouldn't see any continued sequential decline we've seen that now for two quarters. So we think it's prudent for us to be able to take that trend into consideration.

Steven R. Beauchamp: So we think it's prudent for us to be able to take that trend into consideration. You also said Ryan just said he took into account potentially a rate cut, and that's obviously included as well. And so we're also in the back half of the year. So you're only talking about two quarters left.

Speaker Change: Also Ryan just Eddie took into account potentially a rate cut and Thats obviously.

Speaker Change: Included as well and so we're also in the back half of the year. So youre only talking two quarters left so I don't think theres any different in approach, but we felt like we should at least take into account all the things that we have seen so far and that seem at least reasonably possible into the guidance.

Steven R. Beauchamp: So I don't think there's any difference in approach, but we felt like we should at least take into account all the things that we have seen so far and that seem at least reasonably possible to implement. Thank you. Please stand by for our next question. Our next question comes from the line of Alex Lucan with Wolf Research. Your line is open.

Speaker Change: Thanks for taking the questions.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.

Alex Lucan: Hey guys, maybe again, a kind of similar line of questioning. It's a multi-parter, the first being just, if I think about the amount taken out of the guide for this year, I think it's about $20 million on the recurring revenue line. Dis-dimensionalize, like, is half of that employment level and half of that kind of either later starts or less starts? And then, as we're kind of, you know, maybe a few quarters removed from the long-term guide of 20%, given the exit rate of, you know, 12 to 13 in Q4, is this something that's, you know, temporal, and there might be, you know, kind of a year air gap until we Or are we talking more of a quarter? Sure, I can hit the first question, Alex.

Alex Zukin: Hey, guys. So maybe.

Alex Zukin: It kind of similar line of questioning.

Alex Zukin: It's a multi part or the first being just if I think about.

The amount kind of taken out of the guide for this year I think it's about $20 million on the recurring revenue line.

Alex Zukin: Just dimensionalize like is half of that employment levels and half of that kind of either later starts or less starts and then as we.

Alex Zukin: As we're kind of maybe a few quarters removed from the long term guide of 20% given the exit rate of 12% to 13 in Q4 is this something thats.

Alex Zukin: Temporal and there might be kind of a year air gap until we get back to that 20% long term target or are we talking more.

Alex Zukin: A quarter or two.

Speaker Change: Sure I can I can take the first question, Alex I think roughly the impact from macro and the sales headwinds roughly the same impact to the revised guidance.

Ryan Glenn: I think, you know, roughly the impact from macro and the sales headwinds have roughly the same impact on the revised guidance. I wouldn't wait one or the other. They both certainly weighed on the guidance, particularly in the back half of the year. Relative to your second question on the longer term, I'll let Steve handle that. Yeah, I think the way we think about the long-term model is over an extended period of time.

Speaker Change: I Wouldnt wait one or the other they both certainly weighed on on the <unk>.

Speaker Change: Guidance, particularly in the back half of the year relative to your second question on longer term I'll, let Steve handle that yes, I think the way we think about long term model is over an extended period of time and it's something that we've made a couple of updates since we've gone public.

Steven R. Beauchamp: And it's something that, you know, we've made a couple of updates since we went public. We'll consider that as we go into the turn of the year and see if there are any changes that we want to make. We made some changes going into this fiscal year.

Steve: Consider that as we go into the turn of the year and see if theres any changes that we want to made we made some changes going into this fiscal year, we're still focused on growth as a priority.

Steven R. Beauchamp: We're still focused on growth as a priority. We still think there are a lot of levers that we can pull to be able to grow the business. Huge TAM, products getting great adoption, pipelines pretty rich and full. So at this point in time, you know, no changes and the same priority, growth first and continued focus at the same time on margin expansion. That's kind of been our formula for success in the past. Got it.

Steve: We still think there's a lot of levers that we can pull through to be able to grow the business huge tam products getting greater adoption pipeline is pretty rich and full so at this point in time, no changes and same priority growth first and continued focus at the same time on margin expansion and Thats kind of been our formula for success in the past.

Alex Lucan: And maybe just a quick follow up. If I think about kind of everything you've referenced from the sales go-to-market side, the execution side, what gives you kind of incremental confidence that there's also not kind of increased competitive pressure, maybe increased market saturation, that it's not those things, that it really is kind of a temporal fix around both the macro current environment, as well as the, You have a longer time to rant, for sure. Yeah, I think there are several factors there. So I think, number one, it's the conversations that you have with your salesforce, especially the folks that have been here for a long time, and the confidence level that they have in the product and service that we're offering.

Speaker Change: Got it and then maybe just a quick follow up if I think about kind of everything you've referenced from on the sales go to market side the execution side.

Speaker Change: What gives you kind of incremental confidence that there is also not kind of increased competitive pressure maybe increased market saturation that it's those things that it really is kind of a typical <unk>.

Speaker Change: Mixer out both the macro current environment as well as the.

Speaker Change: <unk>.

Speaker Change: Longer time to ramp our sales team.

Speaker Change: I think there are several factors there. So I think number one it's the conversations that you have with your sales force, especially the folks that have been here around a long time and the confidence level that they have in the product and service that we're offering.

Alex Lucan: And then, number two, I think it's the data that we get into. And when we're looking at the pipeline, we're looking at this in detail by deal, looking at what those close ratios look like. And so if, you know, if the pipeline wasn't necessarily building, and we weren't seeing these elongated sales cycles, I probably would have a different answer to that question. But that's very evident in the data that we're looking at.

And then number two I think it's the data that we get into and when we're looking at the pipeline. We're looking at this in detail by deal looking at what those close ratios look like and so if.

Speaker Change: If the pipeline wasn't necessarily building and we werent seeing these elongated sales cycles I, probably would have a different answer to that question, but that's very evident in the data that we're looking at and so that provides us more optimism and then I think lastly, its the conversations that we have with current customers and we're seeing how the product is resonating in the upper end of the space and we're certainly having.

Steven R. Beauchamp: And then I think, lastly, it's the conversations that we have with current customers, and we're seeing how the product is responding in the upper end of the space, and we're certainly having success. And so I think it's when you put those three things together, we think we have an opportunity to execute better in the back half of the year. And, you know, we have a big opportunity from a TAM perspective, and that includes the success we've had over the last several years in Upmarket. Perfect, thank you guys.

Speaker Change: Yes.

Speaker Change: So I think it's when you put those three things together, we think we have an opportunity to execute better on the back half of the year and we.

Speaker Change: We have a big opportunity from a Tam perspective and that includes the success we've had over the last several years and up market.

Speaker Change #100: Perfect. Thank you guys.

Jason Salino: Thank you. Please stand by for our next question. Our next question comes from the line of Jason Salino with KeyBank Capital Markets. Your line is open. Great, thanks for fitting me in. Really sorry to beat a dead horse here.

Speaker Change #101: Thank you.

Speaker Change #101: Please standby for our next question.

Speaker Change #101: Our next question comes from the line of Jason Selina with Keybanc capital markets. Your line is open.

Jason Selina: Great. Thanks for fitting me in really sorry to beat a dead horse here.

Ryan Glenn: But the moderation you're making in on the employment levels in the second half, is there a way to think about the magnitude and the linearity of it? Yeah, I think we hit the magnitude question earlier, and I think the way to think about that is, relative to the revised guidance, half of that impact is macro, roughly speaking, and half of it would be some of the sales headwinds. I think the way that we assume that this is layered in over the balance of the year is that we've seen a very small but consistent decline over the last five months, and we assume that a similar level of decline and further moderation happens each month into Q3 and Q4. There wasn't a particular month or quarter that we had concentration; it was assumed that continued moderation happens over the course of the back half of the year.

Jason Selina: The moderation youre, making in on the employment levels in the second half is there a way to think about the magnitude and the linearity of it.

Jason Selina: Yes, I think we hit the magnitude question earlier.

Jason Selina: The way to think about that is relative to the revised guidance half of that impact as macro roughly speaking and half of it would be some of the sales headwinds I think the way that we assumed that layered in over the balance of the year is we've seen a very small but consistent decline over the last five months and we assumed that similar level of decline in further moderation happy.

Each month.

Jason Selina: And into Q3 and Q4, there wasn't a particular month or quarter that we had concentration. It was assumed that continued moderation happens over the course of the back half of the year alright.

Steven R. Beauchamp: Alright, thanks for the clarification there. And then maybe on the trace acquisition, you know, can you talk about how that fits in or complements to the broader portfolio? And then, you know, with the near-term environment where you're seeing some pressure on workforce levels, you know, how does headcount budgeting and forecasting kind of fit in terms of priority? Yeah, so I think it's certainly been a little bit tighter economy. And when we talk to our customers, they're certainly trying to be able to manage, you know, their costs, as well as, you know, the growth that they might see in their business. And so one of the challenges that our customers tell us about is that people are one of the largest costs that they have. And, you know, when somebody leaves the organization, are you going to replace them? Are you going to replace them right away?

Speaker Change #103: Alright, thanks for that clarification there.

And then maybe on the <unk> acquisition.

Speaker Change #103: Can you talk about how that fits in our complements to the broader portfolio and then.

Speaker Change #103: With the near term environment, where youre seeing some pressure on workforce levels, how does head count budgeting and forecasting kind of fit in terms of priority.

Speaker Change #103: Yes, so I think it's certainly been a little bit tighter.

Speaker Change #103: Our economy and when we talk to our customers and they are certainly trying to be able to manage.

Speaker Change #103: Their costs as well as the growth that they might see in their business and so one of the challenges that our customers tell us about is people are one of the largest cost that they have and.

Speaker Change #103: When somebody then leaves the organization are you going to replace them or are you going to replace them right away or are you going to replace it in a different position. How do you then approve requisitions for new positions all of those concepts in a tighter economy become even more important parts of the conversation and we have all the data about the people and our platform already and so when you can layer in work.

Steven R. Beauchamp: Are you going to replace him in a different position? How do you then approve requisitions for new positions? All those concepts in a tighter economy have become even more important parts of the conversation. And we have all the data about the people in our platform already. And so when you can layer in workflows and approvals for that activity to happen, you can layer forecasting capabilities on rules and routing, that becomes really attractive in terms of driving both cost efficiency for our customers, as well as just purely efficiency in terms of getting those actions done where the data already exists. Thanks.

Clothes and approvals for that activity to happen you can layer forecasting capabilities on rules and routing that becomes really attractive in terms of driving both cost efficiency for our customers as well as just purely efficiency in terms of getting those actions done where the data already exists today.

Speaker Change #104: Interesting thanks.

Matthew Van De Ligt: Thank you. Please stand by for our next question. Our next question comes from the line of Dan Jester with BMO Capital Markets. Your line is open.

Speaker Change #105: Thank you.

Please standby for our next question.

Speaker Change #105: Our next question comes from the line of Dan Jester with BMO capital markets. Your line is open.

Dan Jester: Great, thanks for taking my question. I really appreciate all the clarity on the slowdown and the upper end of your market. I think just to be explicit, if you look at your core customer that has 100 or 200 employees, which I think is close to the average size of the folks we have on the platform, have you seen a change in the velocity of new bookings there or sales? Yeah, I think Toby called out the fact that we've had continued broker referrals that are really strong. That obviously ends up being a big driver in the core end of the market. You know, that's not something that we kind of called out.

Dan Jester: Great. Thanks for taking my question.

Dan Jester: So I appreciate all the clarity on the slowdown in the upper end of your market I think just to be explicit if you look at your core customer that has a 100 or 200 employees, which I think is close to the average size of the folks do you have on the platform.

Dan Jester: Have you seen a change in the velocity of new bookings, there or sales cycles.

Speaker Change #107: Yes, I think Toby called out the fact that we've had continued broker referrals that are really strong. That's obviously ends up being a big driver in the core end of the market.

Speaker Change #107: That's not something that we kind of called out we feel good about.

Steven R. Beauchamp: We feel good about the momentum that we have there. Still a big market, still relatively underpenetrated. I think the point we're trying to make is we've grown relatively quickly in the up market. A lot of new people in that category, some macro impact that we're kind of feeling in there. You add that to what we saw from an overall macro perspective, and that's really the bigger factor worth calling out on the sales side. Great, thank you.

Speaker Change #107: The momentum that we have there is still a big market is still relatively underpenetrated I think the point, we're trying to make is we've grown relatively quickly and up market a lot of new people in that category. Some macro impact that we're kind of feeling in there you add that into what we saw from an overall macro perspective, and that's really the bigger <unk>.

Speaker Change #107: <unk> worth calling out on the sales side.

Speaker Change #108: Okay, great. Thank you and then maybe just get a refreshed take on how you're viewing your capital allocation strategy. It looks like Youre going to end this fiscal year with kind of north of $400 billion on the balance sheet. Most of your acquisitions have been more tuck in in nature.

Ryan Glenn: And then maybe just get a refreshed take on how you're viewing your capital allocation strategy. You know, it looks like you're going to end this fiscal year with kind of north of $400 billion on the balance sheet. Most of your acquisitions have been more tuck-in in nature. How are you thinking about organic versus inorganic?

Speaker Change #108: How are you thinking about organic versus inorganic and is there opportunities to maybe deploy capital in other ways going forward. Thank you.

Dan Jester: And are there opportunities to maybe deploy capital in other ways going forward? Thank you. Yeah, I'd probably give you a fairly consistent answer on that, Dan. I think we ended the quarter with $400 million or so on the balance sheet, and that'll certainly grow as we go through the back half of the fiscal year. You're right.

Speaker Change #108: Yes.

Speaker Change #109: Give you fairly consistent answer on that Dan I think I think we ended the quarter with.

Speaker Change #109: Four 1 million or so on balance sheet and that will certainly grow as we go through the back half of the fiscal year.

Ryan Glenn: I mean, I think we've been pleased with the acquisitions that we've done and being able to use those as drivers for strategy and growing the portfolio. I think that continues to be of interest to us. And I think as we get through the back half of this fiscal year, we'll continue to look at other ways to allocate capital as we go through the year, but there will be no massive change in our mentality around that. Okay, just a quick one on Trace, is that going to be a separate standalone SKU, or is that going to be embedded into another product?

Speaker Change #109: Youre right I mean, I think we've been pleased with the acquisitions that we've done and being able to use those as drivers for strategy and growing the portfolio. I think that's that continues to be of interest to us.

Speaker Change #109: I think as we get through the back half of this fiscal year, we'll continue to look at other ways to allocate capital.

Speaker Change #109: As we go through the year, but I don't know.

Speaker Change #109: No massive change in our mentality around that.

Speaker Change #109: And just a quick one then on trace is that going to be a separate standalone SKU is that going to be embedded into another product.

Steven R. Beauchamp: Yeah, we haven't really made any big announcements in terms of what the product strategy is, but what I would tell you based on our prior acquisitions is that we really try to take the time to build it into our platform such that, from a user perspective, you would have no idea whether we built it ourselves or we acquired it and then used that team that we acquired to build it into our platform. So we're doing that work right now. And We're figuring that out. I definitely think there's a fair amount of value in this product. So if you can save customers time and drive more efficient processes, and ultimately save them money, then that certainly becomes a monetizable option. So that would certainly be the lean sitting here right now.

Yes, we haven't really made any big announcements contribute the product strategy is but what I would tell you based off of our prior acquisitions as we really try to take the time to build it into our platform such that from a user perspective, you would have no idea whether rebuilt it ourselves or we acquired it and then use that team that we acquired to build it into our platform. So we're doing that work right now.

And we're figuring that out I definitely think there is a fair amount of value in the products. So if you can save customers, both time and drive more efficient process and ultimately save them people dollars.

Speaker Change #109: Then that certainly becomes a monetize mobile options so that would certainly be the lean sitting here right now.

Dan Jester: Great. Thank you very much. Thank you. Please stand by for our next question. Our next question comes from the line of Matthew Van De Ligt with BTIG. Your line is open. Good afternoon.

Speaker Change #110: Great. Thank you very much.

Speaker Change #111: Please standby for our next question.

Speaker Change #111: Our next question comes from the line of Matthew <unk> with <unk>. Your line is open.

Matthew: Hey, good afternoon, thanks for taking the question.

Matthew Van De Ligt: Thanks for taking the time to answer the question. Curious on how the referral network performed. Are there any trends there that you're seeing that maybe deviate from what some of the direct business looks like? Yeah, I mean, I think, just a quick refresher, those are referral deals that we end up selling directly, but I think there's no major change in terms of production there. You know, called it out in the script, 25% plus of new business continuing to come from the referral channels, primarily benefits brokers and financial advisors and the like, and I think that's been a really successful channel for us over time, and year in, year out, has also been fairly consistent and fairly consistent throughout the course of this fiscal year to date, so we continue to see a lot of strength there, and it continues to be a producing channel for us Great

Matthew: Curious on how the referral network performed any any trends there that youre seeing that maybe deviate from what some of the direct business looks like.

Speaker Change #113: Yeah, I mean, I think just a quick refresher I mean, that's.

Matthew: Referral deals that we end up selling directly but I think no no major change in terms of the.

Matthew: The production there called it out in the script, 25% plus of new business continuing to come from from the referral channels, primarily benefits brokers and financial advisers and the like and I think thats been a really successful channel for us over time and year end and year out has also been fairly consistent and fairly consistent throughout the course of this Phil.

Matthew: Year to date, so continuing to see a lot of strength there in <unk>.

Matthew: Continues to be a.

Matthew: Producing channel for us.

Toby Williams: And then as you look at some of those upmarket deals where sales cycles are elongating to a certain extent, anything you'd peg there? Are they evaluating more vendors? Is it a little more competitive there?

Great and then as you look at some of those upmarket deals that sales cycles are long getting to a certain extent.

Matthew: Anything you'd pegged there.

Matthew: Are they evaluating more vendors is it a little more competitive there or is the ask trying to get multiple products in the door.

Toby Williams: Or is the ask to get multiple products in the door creating any additional friction than maybe just trying to get your foot in with payroll and go from there? I'm curious how you're analyzing sort of the trends there. Yeah, I don't I don't think any of those things have necessarily been the case.

Matthew: <unk> any additional friction and then maybe just trying to get your foot in with with payroll and go from there I'm curious on how you're analyzing sort of the trends there.

Speaker Change #114: Yes, I don't I don't think any of those things are necessarily been the case I would go back to couple of the comments that Steve Steve made I think we've continued to see the pipeline build I think we've continued to get access I think what we've seen as you have you might have more decision makers you might have more gates in the process more reviewers in terms of.

Toby Williams: I'll go back to a couple of the comments that Steve made. I think we've continued to see the pipeline build. I think we've continued to get access. I think what we've seen is, you know, you might have more decision makers. You might have more gates in the process, more reviewers in terms of the actual purchasing. And so I think those have been more the dynamics than, you know, challenges gaining access or challenges around, you know, how much product gets added into a deal or something like that.

Speaker Change #114: The actual purchasing and so I think those have more been the dynamics then.

Speaker Change #114: Challenges gaining access or.

Speaker Change #114: Challenges around.

Speaker Change #114: How much product gets added into a deal or something like that I think we've seen product take rates remained fairly consistent throughout.

Toby Williams: I think we've seen product take rates remain fairly consistent throughout all sorts of areas of the market. And like I said earlier, I think we've also been happy with the attach rates that we've seen with some of the newer products. So I think that's what we've seen so far. All right, great, thank you.

Speaker Change #114: All sorts of areas of the market and like I said earlier I think we've also seen we've also been happy with the attach rates that we've seen with some of the newer products. So I think that's what we've seen so far.

Adam Berger: Thank you. Please stand by for our next question. Our next question comes from the line of Adam Berger with Bank of America. Your line is open.

Speaker Change #115: Alright, great. Thank you.

Speaker Change #116: Thank you please standby for our next question.

Our next question comes from the line of Adam <unk> with Bank of America. Your line is open.

Steven R. Beauchamp: Hey, thanks for taking my question. So just given the macros, obviously, out of your control, what are some of those growth levers that you mentioned that you think you can pull within the next six to 12 months, so to speak?

Adam: Hey, Thanks for taking my question.

Adam: Just given the macro is obviously out of your control where some of the growth levers that you mentioned that you think you can pull within the next six to 12 months so to say.

Steven R. Beauchamp: Yeah, so I think a lot of the growth levers that we have been pulling for the last several years continue to be an opportunity for us. So we've had a pretty robust new product introduction cycle. Toby mentioned we're pretty happy with the initial take rates there, so attaching those to new customers and selling those back to customers became an opportunity. Obviously, rolling into traceability and getting that product out in the market will be a future opportunity.

Adam: Yes, so I think theres a lot of the growth levers that we have been pulling for the last several years continue to be an opportunity for us. So we've had a pretty robust new product introduction cycle until we mentioned, we're pretty happy with the initial take rates there. So.

Adam: Catching those new customers and selling those back to customers become an opportunity.

Adam: Obviously rolling into trace and getting that product out in the market will be a future opportunity. So we're excited about what we got from a product perspective.

Steven R. Beauchamp: So we're excited about what we have from a product perspective, and then I think overall, we've got a pretty significant presence both in our core market as well as in the up market. And we're getting good receptivity for those products and the enhancements that we're making to the product. So we're really leading with the most modern platform in the industry. And we feel good about that. It's really up to us to be able to continue to execute. The broker channel remains really strong. We're executing really well there. So there are certainly a lot of positives.

Adam: And then I think overall, we've got pretty significant presence both in our core market as well as upmarket.

Adam: And we're getting good receptivity of those products and the enhancements that we're making to the product. So we really leading with the most modern platform in the industry and we feel good about.

Adam: That it's really up to us to be able to continue to execute broker channel remains really strong we're executing really well there.

Adam: So there's certainly a lot of positives, we obviously focus on this call on areas that we have opportunity to make improvements and we're committed to make those improvements and our turnover rate has been really really low. So we've got the team to be able to do it and we've got a strong pipeline and that's what we're going to focus on.

Steven R. Beauchamp: We obviously focus on this call on areas that we have the opportunity to make improvements in. And we're committed to making those improvements. And our turnover rates have been really, really low. So we've got the team to be able to do it. And we've got a strong pipeline.

Adam Berger: And that's what we're going to focus on. Thank you for that. And, following up, is it fair to say you'll lean in a little bit more into UPSL, or is that focus unchanged?

Speaker Change #118: Thank you for that and I guess following up is it fair to say you're leaning.

Speaker Change #118: A little bit more upsell or has that focus unchanged.

Steven R. Beauchamp: We have been gradually leaning in gradually more to upsell. Over the last few years, we've called out the fact that our internal salesforce that's selling back to the customers has grown at a much faster rate than any of our other salesforces. And that team has done really well this year. It's certainly a standout for us.

Speaker Change #118: We have been leaning in gradually more to upsell over the last few years, we've called out the fact that that our internal sales force thats selling back to the customers has grown at a much faster rate than any of our other sales forces.

Speaker Change #118: And that is that team has done really well this year.

Speaker Change #118: It's been certainly a standout for us and so we'll continue to do that on a go forward basis.

Steven R. Beauchamp: And so we'll continue to do that on a going forward basis. Great, thank you all. Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to management for closing remarks. Well, thank you very much for all of your interest in Paylocity, and I just want to echo one of Toby's sentiments from the prepared remarks, thanking all of our employees for their efforts over a very busy year end. Have a great evening, everyone. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Beep. Copyright 2020 Mooji Media Ltd. All Rights Reserved.

Speaker Change #119: Great. Thank you all.

Speaker Change #120: Thank you.

Speaker Change #121: Ladies and gentlemen at this time I would like to turn the call back over to management for closing remarks.

Speaker Change #122: Well. Thank you very much for all of your interest in Pelosity and I just wanted to echo one of Toby sentiments from the prepared remarks thanking all of our employees for their efforts over a very busy year and half.

Speaker Change #123: Have a great evening everyone.

Speaker Change #124: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Speaker Change #124: Okay.

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