Q3 2024 Paylocity Holding Corp Earnings Call
Okay.
Talked about some of our new financial targets, we've had a really good year from an adjusted EBITDA expansion and making sure that we're really balancing a focus on growth as the number one priority, but really a close second as driving profitability targets and we think as we go into next year, we have an opportunity.
And just about how competitive dynamics are changing I know kind of at a high level. The competitive environment may not change all that much but you have companies like workday that are moving down market and I just want I was wondering.
That market.
Sure.
So we have been expanding up market over the last several years.
<unk> expanded that target market up to 5000 employees a.
A couple of years ago, and have really had great success over the last couple of years. If you look at the growth rate last fiscal year and the year before we would have called up market as being one of the segments that was a real strong performer for us.
Yes.
This year as we entered it has gotten much bigger we expanded pretty rapidly as we saw great receptivity and from a customer perspective, we were really happy with our win rates and we expanded that a fair amount and I think what we saw and we called this out last quarter as it took a little bit longer as some of the new reps to be able to ramp up than we expected and we just saw elongation in the sales cycle really in the first.
Quarters of the year.
As we sit here today, we feel really good about the initiatives that we've had to kind of improve that throughput.
We're not all the way through that but we certainly are in the middle of it and I think you saw the performance in the quarter I think we would tell you we're having success across the board to be able to get to that level of performance. We feel good about where we sit right now and we.
We don't feel like the competitive environment as such that we can't be successful our win rates have been consistent over time.
And we feel really good about the investment we've made in product and the feedback we're getting for customers in that segment.
Thanks.
Speaker Change: Thank you and one woman as we move on to our next question.
Speaker Change: And our next question is going to come from the line of Adam <unk> with Bank of America. Your line is open. Please go ahead.
Adam: Hey, Thanks for taking my question.
Adam: Going into the linearity a bit this quarter, where January through March Australia, consistent in terms of demand.
Adam: And as a brief follow up did you see some incremental pressure towards the tail end of the quarter that is informing the deceleration to 13% for Q4. Thank you.
Speaker Change: But maybe just on the linearity and then I'll, let Brian you can handle the other one.
Speaker Change: From a bookings perspective, there's just like a natural seasonality to this business that occurs so you typically see clients start at.
Adam: At the start of each quarter. So January ended up being a big start month for as April ends up being kind of a big start months of July and October. So that's just a natural progression the months in between can be relatively even so no real callouts on those and we didn't see anything abnormal from a seasonality perspective in the quarter.
Speaker Change: Yes, I guess I would just add relative to the question on the fourth quarter I think if you look at what the implied Q4 guidance was when we guided in February I think it's probably come in a touch better than that and I think that as a relative to the performance. We saw in the third quarter from a from a sales.
Adam: Execution standpoint, so nothing that I would call out that was necessarily as surprise on the fourth quarter and I think you see that flow through from a guidance standpoint.
Speaker Change: Thank you.
Speaker Change: Thank you and one moment as we move on to our next question.
Adam: And our next question is going to come from the line of Daniel Jester with BMO capital markets. Your line is open. Please go ahead.
Daniel William Jester: Great. Thanks for taking my question.
Daniel William Jester: Maybe a couple for Ryan start.
Daniel William Jester: Just on that last point about what's baked into the fourth quarter guide if I remember correctly, you had a rate cut baked into that and so I guess, one correct me if I'm wrong into.
Speaker Change: Uh huh.
Speaker Change: How you are viewing that now in the fourth quarter guidance and then on the third quarter gross margin.
Speaker Change: Had basically two consecutive years of really strong expansion year over year, there, but it looks like gross margin, maybe it was kind of flattish year over year, and so anything you'd call out for investment or how we should be thinking about gross margin going forward. Thanks.
Speaker Change: Sure. So I guess relative to your first question I did reference in my prepared remarks that we do not have a rate cut now assumed in the fourth quarter. You are correct that when we guide in February we didn't call out a Q4 rate cut we have taken that out based on latest forecast and I think you've seen that flow through from a implied interest income.
Speaker Change: In the fourth quarter. So we took up total revenue guide by about $8 5 million and I think call it $6 million or so of that was in interest income rates. So that is certainly the performance. We saw in Q3 with an interest income as well as the removal of that rate cut, which which helped the fourth quarter.
Speaker Change: I think relative to your question on gross margin I think it can move around quarter to quarter year to date I think were up about 40 basis points on adjusted gross margin. Obviously, we've seen some headwind year to date relative to some of the workforce level headwinds that we've seen for the first nine months of the year, but I think if you look to look back and think about that holistically across a 12 month period.
Speaker Change: We would expect it to drive leverage.
Speaker Change: Year on year, not always linear right and that can get the same leverage each year, but as you step back and look at it on a longer term basis. We continue to believe that there is the ability to scale adjusted gross margin and I think that goes for the balance of the P&L you saw some really significant leverage in G&A not only this quarter, but year to date, obviously, we raised.
Speaker Change: Adjusted EBITDA guidance by call it $50 million in almost 100 basis points. So continue to feel really good as we said earlier in the call not only about strong revenue growth and execution, but.
Speaker Change: Things like free cash flow being up 50% large raises in adjusted EBITDA and the ability to return value to shareholders through the buyback.
Speaker Change: That's great. Thanks, and then if I can just sneak one more in.
Speaker Change: <unk> added a lot of new products to the platform over the last year and some change maybe just an update in terms of customer uptake of the newest iteration of products and maybe compare and contrast, as some of the things that you've launched in the past as the velocity of attach rate.
Speaker Change: Similar different anything you'd call out there. Thank you.
Speaker Change: Yes, we've been really happy with the products that we've launched really.
Speaker Change: As you think about this past fiscal year, you've got scheduling plus which as an advanced scheduling capability.
Speaker Change: As certainly been received very well, probably skews slightly average sized customer being a little bit larger for those capabilities, but that's really helped us in that market and we are continuing to develop new features for that scheduling plus SKU. So we think that that remains an opportunity going forward.
Speaker Change: <unk> voice and rewards and recognition really great differentiators for us in the sales process, we always talk about trying to make sure. When we build something we can get to 10% to 20% market penetration within a reasonable time I think all of those products are kind of on track to hit those targets relative to what we've seen with other modules that we built in the past.
Speaker Change: So we feel really good about the receptivity and I think the other point I would make as.
Speaker Change: Really nice differentiators as well so as not just about actually driving the incremental <unk>, but it's also about creating and adding value to the differentiated story that we're telling in the market.
Speaker Change: Great. Thank you very much.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: And our next question comes from the line of Jason Leon with Keybanc capital markets. Your line is open. Please go ahead.
Jason Vincent Celino: Great. Thanks.
Jason Vincent Celino: And I think this might be the first time, you've mentioned being the.
Jason Vincent Celino: Modern HR platform resonating with Gen Z.
Jason Vincent Celino: Customers specifically.
Jason Vincent Celino: As you say this focus as a trend that others are also pursuing ours as a differentiator that philosophy.
Speaker Change: That's a good question well I think <unk> as a growing part of the workforce.
Speaker Change: And that will continue to be the case I think the other call out as <unk> often has very different demands on HR departments.
Jason Vincent Celino: And those demands are things like they really want to be able to have a voice in decisions that are made they want to understand how things are being community. They want things to be communicated them in as much more real time basis, they really like a multimedia type approach to be able to understand what's going on and they really want to know what the organization culture as in their values because the reality is as still a very.
Jason Vincent Celino: Labor market and they have options from a job perspective, and they don't have a problem moving from one to the other and so organizations have to spend a significant amount of time not only on things like compliance and making sure payrolls right, making sure you are on boarded but really trying to find connection.
Jason Vincent Celino: Developing career paths, making sure the training opportunities and so if you think about all of those challenges that all the HR teams have many of the products that we have built over the last several years have really tried to provide unique capabilities for HR departments to be able to handle the dynamic nature of a multi generational workforce.
Jason Vincent Celino: When youre dealing with in a tight labor market and so I think that message has resonated for the last several years and I think it certainly does today.
Jason Vincent Celino: And we wanted to just call. It the fact that many of our features including our mobile app in the ratings and the intuitive nature.
Jason Vincent Celino: Feedback intuitive nature of the product has really gotten us great feedback in terms of how customers are managing the growing Gen Z population.
Speaker Change: Okay, Great and then maybe just a quick one for Brian I think it sounds like the workforce level moderated in line with what you expected last quarter, but the Q4 guide for recurring revenue also continued.
Speaker Change: Further moderation in the workforce levels. Thanks.
Brian: Yes, I think Thats correct. So Q3 came in consistent with expectations was which was some level of further moderation and then we did bake in.
Brian: Beyond that some additional moderation in Q4 and given I think that there is still some uncertainty out there from a macro standpoint, we didn't add up as update that assumption as well, obviously see how that plays out but that as the expectation going into Q4 from a guidance standpoint.
Speaker Change: Perfect. Thank you.
Speaker Change: Thank you and one moment for our next question.
Speaker Change: And our next question is going to come from the line of Alex Zukin with Wolfe Research. Your line is open. Please go ahead.
Aleksandr J. Zukin: Hey, guys. Thanks for taking my question and congrats on all the best.
Aleksandr J. Zukin: Payroll thread.
Aleksandr J. Zukin: The season I guess, maybe just two quick ones for me first can we put a finer point on what gives you the confidence or conviction that these longer sales cycles or the higher end of the market are a kind of a macro versus micro or competition.
Aleksandr J. Zukin: Dynamic.
Speaker Change: Yes, it's a good question so what we really look at it as we look at.
Aleksandr J. Zukin: First the pipeline at the top end and so first time appointments.
Aleksandr J. Zukin: Mo appointments that we're having with prospects.
Aleksandr J. Zukin: And then we track the duration of all of the various stages in the sales cycle and so you know.
Aleksandr J. Zukin: When things are challenging from a macro perspective things stay in each of those stages for longer. So if it usually took US 35 days to go from one stages as the next and all of a sudden as taking as 55 days.
Aleksandr J. Zukin: That's an indicator and.
Aleksandr J. Zukin: And as long as Youre, not losing them off the bottom in the law and your win rate as staying relatively similar that's how we really kind of come to the conclusion that there is some macro uneasiness going on there.
Aleksandr J. Zukin: And so that's really what we've seen there as initiatives that you try to drive towards that right you get more teams involved with that you really try to understand what an organization as concerns might be to try to help move them along through the funnel. So it's not like there's nothing we can do about that and thats, what we called out last quarter, sometimes as training reps to be able to have to manage those situations, making sure all the right people as.
Aleksandr J. Zukin: The prospect are involved in the decision and we've done a lot of that over the last quarter.
Aleksandr J. Zukin: And we feel like those initiatives are absolutely going to have an impact and even if the market.
Aleksandr J. Zukin: Stays a little bit soft in terms of people, making decisions we feel like we've got the right solution for getting the right feedback we like the win rates that were driving and we've got initiatives driving back to the team. So theyre just going to be better at handling.
Speaker Change: Got it that makes sense and then.
Speaker Change: The second question as it's going to be a little bit long winded, but bear with me.
Speaker Change: As you look at the last kind of tiny you guys talked about that $2 billion target.
Speaker Change: <unk>.
Speaker Change: 90% growth rate.
Speaker Change: Kind of how youre getting there roughly in fiscal 'twenty six and now if you think about the exit growth rate for Q4 and kind of.
Speaker Change: Saying that through.
Speaker Change: The number as it roughly as you are getting there in about one year later.
Speaker Change: Is it fair to assume that like Youre looking at the growth rate of your overall business as like a large growing.
Speaker Change: Acts in the kind of core growing why and that moderation in that large growth rate as what's driven that kind of one year out.
Speaker Change: To push that target one year out or help us understand maybe if we kind of again break it apart into those two categories how to think about it.
Speaker Change: Yes, I think.
Speaker Change: We would we would really look at the growth rate across our different segments have been fairly uniform on a go forward basis, we did call out. The fact that it was faster for several years, but it's really kind of getting in line with kind of our core segment as well as the larger upper end I mean, I think this as a little bit of a function of being at a one.
Speaker Change: $4 billion business hitting scale, sometimes even though there is a large market opportunity, it's a competitive market and it can and it can be more challenging to be able to grow at that same rate. When you were half the size and so.
Speaker Change: We're still prioritizing growth, we're still going to focus on doing everything we can to be able to grow as fast as we can.
Speaker Change: And at the same time, we think we can kind of balance all the profitability targets and so I think it becomes a little bit more of a balanced story than just only growth and.
Speaker Change: We feel like that's the right thing to do to deliver the most shareholder value.
Speaker Change: Got it perfect. Thank you guys.
Speaker Change: Thank you and one moment as we move on to our next question.
Speaker Change: And our next question comes from the line of City Pentagon with Mizuho. Your line is open. Please go ahead.
City Pentagon: Thanks for taking my question and congrats on a good quarter. So Ryan if I look at your Q3 second sequential growth rate.
City Pentagon: Our recurring and other revenue of 23% that as better than lost last year Q3, but as <unk>.
City Pentagon: Q1, and Q2 sequential growth or cars or way below last year. So Q2 was there any kind of annual price increase for filing.
City Pentagon: Filing or any kind of pull forward of any go live or was there any.
City Pentagon: Organic revenue contribution like Chris or anything like that.
Speaker Change: No nothing that we would call out from a from a one time or unexpected source of revenue and in the third quarter I didn't get this question and some of the after quarters last last quarter relative to to sequential revenue and I think where we sat guiding in I think February seven or so we obviously had a really.
City Pentagon: Good idea of what started in January we had a very solid number from a W. Two informed filings perspective, and I think we are able to take all that into account in the quarter. So certainly came in incrementally better than expectations, but on a $366 8 million number.
City Pentagon: We're really about 300, K or so above the top end of the range. So incrementally better, yes, but relative to that size. I think we were certainly pleased with the results, but nothing I would call out as material and onetime nature.
City Pentagon: And just to clarify that when he said is there as a form filing this year was different.
City Pentagon: The reason I'm asking is the recurring versus form filing I know you guys don't split, but how should we think about when you think over next year Q3.
City Pentagon: As at any one time big floor.
City Pentagon: <unk> filing.
City Pentagon: Yeah. So this is Steve so form filing as going to be built based off of the number of employees that you have in the previous calendar year.
Steve: And if you think about that as kind of kind of grow with the number of client employees on our platform. We're also selling them a lot more products. So if anything on a year over year basis form filing typically doesn't always grow as fast as the rest of our revenue. So it's not actually a tailwind from a growth rate perspective, if anything it's slightly a slight headwind so and there was not.
Steve: Out of the ordinary this year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you and one moment our next question.
Speaker Change: And our next question comes from the line of Matt Van Vliet with <unk>. Your line is open. Please go ahead.
Speaker Change: Hey, good afternoon, thanks for taking the question.
Speaker Change: I guess as you look at the progress of some of that go to market.
Speaker Change: Corrections or strategy as you put in place over the last several months and the improvements clearly showing here.
Speaker Change: I guess sort of two parts one how much more do you feel like you have to go or just sort of get.
Speaker Change: The reps and the time based elements through the system. There and then maybe more importantly, how is this impacting your head count planning, especially on the sales front.
Speaker Change: Not only through the end of this year, but as Youre planning fiscal 'twenty, five and maybe how that shaped up.
Speaker Change: In light of the improvements over the last few months.
Speaker Change: I don't think it changes our approach I think we called out last quarter, we would be focused on productivity opportunities the balance of this year and as we go into next year. So that's been factored into our thought process around head count, we definitely think theres opportunities. There we like some of the signs that we're seeing in terms of early and those opportunities I think the only call out I would say as.
Speaker Change: If you think of our average sized customer you can sell that by the time. They agree to go on four to six week implementation all of that revenue happens pretty quick when you go up market and you're kind of above 1000 employees you definitely can add people committing call. It four to five or even six months ahead of time, starting so you do you have these initiatives you start to see the value of those <unk>.
Speaker Change: Start to see that in terms of clients signing up.
Speaker Change: But the start dates obviously it can be several months out and so it does have a little bit of a longer.
Speaker Change: Time period between driving the initiatives seeing the improvements and then actually being able to kind of recognize that revenue as started so if I was sitting here today I would tell you that.
Speaker Change: Our Big Super Bowl every year as January and so a lot of these large initiatives will have large client start every month, but certainly we are focused on driving improvements throughout the balance of this calendar year and getting ready. So that we've got a great January of next fiscal year and that as typically the cadence when your upper end of the market.
Speaker Change: Okay very helpful and then.
Speaker Change: Yes, just quickly on the uptake of additional products and sort of customers taking on more of the platform are you seeing any differing trends, whether it's down market or up market in terms of customers' willingness and desire to take on more product.
Speaker Change: No I think.
Speaker Change: Don't think we've seen any any real shift in that I mean, I think we've been.
Speaker Change: Both happy with the amount of <unk> that we've been able to realize over time, even as we've driven that from 200 to over $5 50, your realization rate or realize <unk> Ben.
Speaker Change: At or north of 50% I think that's been fairly consistent and I think part of the reason that's the case as you get broad based adoption across each part of the market and I think that's been the case over the last few years and I think that continues to be the case as we think about fiscal 'twenty four.
Speaker Change: Alright, great. Thank you.
Speaker Change: Thank you I'm showing no further questions at this time I would like to hand, the conference back over to management for closing remarks.
Speaker Change: Sure. Thank you. So much just wanted to say thank you to everyone for your interest in velocity and I also wanted to give a special thank you to all of our teams across Pelosity and especially our operations team for a great job supporting all of our clients in the course of Q3. So thank you everybody and hope you have a great night.
Speaker Change: This concludes today's conference call. Thank you for participating you may now disconnect.
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