Q1 2025 Paylocity Holding Corp Earnings Call
Today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing. These results currently available in our press release, which is located on our website at <unk> Dot com under the Investor Relations tab and filed with the Securities and Exchange Commission.
Please note that we are unable to reconcile any forward looking non-GAAP financial measure to their directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.
In regard to our upcoming conference schedule I will attend the Needham virtual SaaS one on one conference on November 20, <unk>, the Cowen virtual Human capital Management Summit on December 9th in the Barclays Global Technology Conference in San Francisco on December 12, and Toby will attend the Needham growth Conference in New York on January 14th. Please let me know if you'd like to schedule time with us at any of these events.
With that let me turn the call over to Steve.
Thank you Ryan and thanks to all of you for joining us on our first quarter fiscal 'twenty five earnings call. We started off fiscal 'twenty five with strong financial results with recurring and other revenue growth of 14, 2% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace total revenue was 360.
$3 million or 14, 3% growth over Q1 of last year, our growth continues to be fueled by our ongoing commitment to driving innovation and providing the most modern software platform in the industry highlighted by our recent acquisition of airbase, a modern finance and spend management software solution that combines bill pay accounts payable automation.
Management corporate cards, and procurement capabilities, the integration of airbases finance solutions within our existing HCM platform will allow our clients to manage all payroll and non payroll spend through a single pane of glass, allowing for real time visibility faster financial close improved planning and stronger financial controls.
Innovation also continues to be recognized by third parties as Pelosity was recently named an overall leader in 10 HCM product categories. In <unk> fall 2020 for grid report, marking 24 straight quarters of leading the HTM pack I would now like to pass the call to Toby to provide further color on the quarter. Thanks.
Thanks, Steve in October we held our annual elevate client conference, where we hosted several thousand business leaders, representing HR finance, it and operations across dozens of sessions over the course of two days and elevate we continued to build upon our position as the HCM industry leader and incorporating AI and other emerging technologies into our platform with the launch of the.
A new Pelosity AI assistant a powerful conversational AI, driven chatbot designed to streamline HR processes and elevate the employee experience the pelosity AI assistant simplifies HR related tests by providing real time contextual support across our entire platform, enabling our clients to more quickly complete their administrative tasks and <unk>.
Your employee questions, helping to make the pelosity platform more efficient and improve the employee experience for example clients can leverage our AI assistant to answer common questions such as how do I set blackout dates for PTO or how do I adjust my accrual rates. Additionally.
Additionally, our AI assistant provides clients with AI driven recommendations across the platform, including curated recommendations for new employees within LMS and identifying which employees are available and qualified to fill open shifts system administrators can also leverage the AI assistant to create track and manage customer service tickets.
<unk> time spent on administrative tasks and freeing up more time to spend on strategic initiatives.
We continue to see strong demand for our modern employee focused solutions across our target market and we're pleased with the momentum in our sales team through selling season. We're similarly happy with the consistency of our referral channel, which once again delivered more than 25% of our new business in Q1.
The strong culture Pelosity continues to be recognized externally as we were recently named to the fortunes best workplaces in technology in 2024, echoing Steve's comments I would like to thank all of our more than 6000 employees for a strong start to fiscal 'twenty five I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 'twenty five guidance.
Sure.
Thanks, Tobey total revenue for the first quarter was $363 million, an increase of 14, 3% with recurring and other revenues up 14, 2% from the same period last year. Our sales team had a solid start to the year and we were pleased to come in $4 5 million above the top end of our revenue guidance with the majority of our revenue coming from recurring and other revenue, allowing us to.
<unk> raised our fiscal year guidance by more than our Q1 beat with a further increase in revenue guidance due to the impact of the year based acquisition.
As a reminder, the airbase acquisition closed on October <unk> and did not impact our financial results in Q1.
Our adjusted gross profit was 74% for Q1 versus 73, 4% in Q1 of last year, representing 60 basis points of leverage as we continue to focus on scaling our operational costs, while maintaining industry leading service levels.
We continue to make significant investments in research and development and to understand our overall investment in R&D is important to combine both what we expense and what we capitalize on a dollar basis, our year over year investment in total R&D increased by nine 1% when compared to the first quarter of fiscal 'twenty four and we remain focused on making investments in R&D throughout fiscal 'twenty five as we continue.
To build out the pelosity platform to serve the needs of the modern workforce.
In regards to our go to market activities on a non-GAAP basis sales and marketing expenses were 21, 6% of revenue in the first quarter and we remain focused on making investments in this area of the business in fiscal 'twenty five to drive continued growth.
On a non-GAAP basis G&A costs were nine 5% of revenue in the first quarter versus 10, 3% in the same period last year, representing 80 basis points of leverage as we remain focused on consistently leveraging our G&A expenses on an annual basis.
Our adjusted EBITDA for the first quarter was $129 million or 35, 5% margin and exceeded the top end of our guidance by $8 5 million and represented 250 basis points of leverage versus Q1 of fiscal 'twenty four excluding the impact of interest income on funds held for clients adjusted EBITDA margin for Q1 was 29, 8% reflecting.
Operating leverage of 270 basis points versus the same period last year.
Briefly covering our GAAP results for Q1 gross profit was 248 million operating income was $64 1 million and net income was $49 6 million.
In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $778 5 million, which includes a $325 million, we drew down on our revolving credit facility in late September to fund the acquisition of airplanes that closed on October one.
In regard to client held funds and interest income our average daily balance of client funds was approximately $2 6 billion in Q1, we're estimating the average daily balance will be approximately $2 65 billion in Q2 with an average annual yield of approximately 400 basis points, representing approximately 26, 5%.
Million of interest income in Q2.
On a full year basis, we are estimating the average daily balance will be approximately $2 75 billion with an average yield of approximately 390 basis points, representing approximately $108 million of interest income.
In regard to interest rates our guidance reflects the recent 50 basis point rate cut in September with an additional rate cut of 25 basis points in each of November December March and May for a total of 150 basis points of rate cuts included in guidance.
Additionally, given the confidence we have in our business and our strong cash flows. We may continue to execute against the remaining 350 million authorized in our share repurchase program over the course of fiscal 'twenty five.
To date, we have repurchased $150 million or approximately $1 1 million shares of common stock reducing diluted shares outstanding by approximately 600000 shares or one 1% as of September 30 versus the same period last year.
Finally, I'd like to provide our financial guidance for Q2 and full fiscal year 'twenty five.
We are increasing our fiscal 'twenty guidance based on two key factors first our strong results in Q1 and the momentum across our sales organization as we enter the heart of selling season and second the impact of Air base, which is expected to represent approximately 1% of total revenue in fiscal 'twenty five.
Additionally, we're updating our adjusted EBITDA guidance based on two key factors first is our strong results in Q1 and increased organic profitability expectations for fiscal 'twenty, five and second the dilutive impact of air base, while airbase is expected to dilute adjusted EBIT margin by approximately 100 basis points. This fiscal year. We are realizing increased success in driving profit.
Global growth across our business, helping to offset this impact.
With that said for the second quarter of fiscal 'twenty five.
<unk> and other revenue is expected to be in the range of $337 5 million to $342 5 million or approximately 14% growth over second quarter of fiscal 'twenty for recurring revenue and.
In total revenue is expected to be in the range of 364 million to $369 million of approximately 12, 3% growth over second quarter of fiscal 2000 and for total revenue.
Adjusted EBITDA is expected be in the range of $116 million to $120 million and adjusted EBITDA. Excluding interest income on funds held for clients is expected to be in the range of $89 5 million to $93 5 million.
And for fiscal 'twenty, five we are increasing recurring and other revenue guidance, which is now expected to be in the range of one for $2 7 billion to one 404 2 billion or approximately 12% growth over fiscal 'twenty four recurring and other revenue.
Total revenue guidance is also increasing and is expected to be in the range of one five to $3 5 billion to $1 55 billion or approximately 10% growth over fiscal 'twenty for <unk>.
Adjusted EBITDA is expected to be in the range of $530 million to $540 million and adjusted EBITDA. Excluding interest income on funds held for clients is expected to be in the range of 422 million to $432 million.
In conclusion, we are pleased with our Q1 results and the momentum we have across our sales and operations team as we enter the busiest time of the year. Operator, we are now ready for questions.
As a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, we ask that you. Please limit yourself to one question one follow up one moment, while we compile the Q&A roster.
Our first question is going to come from the line of Scott Berg with Needham <unk> Company. Your line is open. Please go ahead.
Hi, everyone really nice quarter here, thanks for taking my questions.
Speaker Change: Toby Steve wanted to start off with airbase.
<unk> had the assets for about 30 days now maybe any initial observations since you've had it and then how do we think about specifically kind of your.
If you go to market motion around this product and enabling the sales force how much of a different type of sale will this be in will you ultimately need a separate sales force to.
Speaker Change: To sell air base or can your existing salesforce effectively sold.
So I think as you mentioned Scott it's been 30 days and I think so far we've spent a bunch of time with the team we're really happy with the team that has kind of come over in the acquisition.
Started very early stages integrating things like go to market motion product strategy.
So I don't think we have all the answers right now I think we still feel very confident with the thesis which is the ability to be able to sell back to our customers spend management solution, where we leverage the employee data to really automate many of the workflows much of the spend activity and then on the back end of that being able.
To really leverage the data insights I think our conversations with their teams and our teams together, we feel really confident that that will offer a tremendous amount of value I think if you look at historically, how we've approached acquisitions.
It typically has taken us somewhere in the 12 to 18 months to have a fully integrated product to market. We will do this in stages. There is obviously bigger and stand alone and so we won't wait that entire time to start gaining value from it but we feel like we can.
Leverage some of our internal go to market motion as we've sold back to the client base. Many other products and be able to do the same thing with BR based solution.
Speaker Change: Got it helpful and then Toby.
Toby talked about the strong start to the selling season and pleased with what <unk> seen to date I guess as you look at the transactions in Q1, and how Youre thinking about this busy selling season.
As the composition of deals kind of different today versus a year ago did not youre seeing maybe more.
Net new customers in the pipeline versus some expansion activity or maybe that slips.
Speaker Change: Yeah.
Speaker Change: Yes, I would say overall.
We're definitely in the heart of selling season, and I think so far we are pleased with the momentum we're seeing feel good about how the team is executing obviously, a big part of our ability to beat in Q1 was relative to <unk>.
Our performance from a sales and go to market perspective, So I think that feels good the momentum of that carrying into selling season feels good I think the demand environment feels good and stable to us and then I think the execution of the team both from a go to market perspective, and then also relative to our channel performance also feels good and.
Speaker Change: I think we're seeing a consistent mix of both new business and back to base with what we would've seen.
Speaker Change: Last quarter and over the last few quarters. So I think all of that feels the momentum in all of that also feels feels good feels strong.
Great Congrats on a good quarter and thanks for taking my questions.
Speaker Change: Thank you and one moment our next question.
Our next question comes from the line I understand Matt Samana with Jefferies. Your line is open. Please go ahead.
Matt Samana: Hey, good evening, and I'll Echo Scott's comments to get to see the nice quarter, Brian maybe one for you just as I think about the guidance increase.
It's been uneven in terms of in the past few quarters are flowing through B, It's just as we digested.
What was going on the macro environment. So flowing the full beat Ford can you maybe help us understand what gives you the confidence that the start to the selling season are there other green shoots that you're seeing just maybe help me understand that and then I have a follow up.
Sure, Yes, I think thanks, Matt So as you think about the guidance increase particularly on the on the recurring side, we increased guidance by $22 million I think of that as roughly two thirds of that or the impact of air basis as you've quantified in the call roughly 1% of revenue this year and to your point I think that the balance of the guide is the entirety of the.
Matt Samana: Q1 beat plus plus some incremental upside and I think that's really driven off of the momentum we're seeing in the sales force I think we obviously are looking at activity levels demand levels Toby's point I think each of those items have been continued to be strong. So as we look at where we are relative to pipeline and relative to execution required to hit our January <unk>.
<unk> in the back half we felt very confident that we were able to pass all of that beat in Q1 as well as something incrementally through.
Great and then maybe this could be for Steve or for Tobey, but when you think about from a product perspective on air base and the integration. There can you walk through maybe what some of the efforts on the product side, how long we should think that that part in particular should take and how soon would it take to make it look like it was one product or a single pane of glass.
Matt Samana: Last.
Speaker Change: For products for customers on both sides of the product.
Yeah sure. So I think just our approach generally towards prior product acquisitions as we definitely want to take the time. So that we can deliver the right level of user experience and truly deliver an integrated solution you can see that with our head count product launch, which client can be starting in January which we feel really good about.
Speaker Change: This is a little bit different because they've got a little bit more of a substantial standalone client base and so there is an opportunity for us to attack. This a little bit more incrementally may be a little bit more how we attack something like blue marble.
And so I would see this continuing to get more integrated and better.
As time goes on I think we believe that we'll make some improvements to that really certainly in the first year of having that acquisition, but youll see even greater improvement come.
Speaker Change: 12 to 24 months and we'll continue to integrate those solutions. So you think of things like workflows and insight and reporting that might take a little bit longer but once you start delivering those you really truly get the value of the integrated platform. So it's a big acquisition for US. It is important to US we're focused on it and we feel confident we're going to be able to deliver the right solution to a custom.
Speaker Change: <unk>.
Speaker Change: Great I appreciate the time as always.
Thank you one moment our next question.
Speaker Change: Our next question is going to come from the line of Mark Marcon.
Robert W. Baird. Your line is open. Please go ahead.
Good evening and thanks for taking my questions and congratulations on the strong performance I'm wondering with regards to airbase.
What's the initial reaction from your existing clients. What are you hearing from them any sort of feedback that you've gotten I'm just wondering what youre hearing.
I mean, I think at the end of the day the existing clients don't have a lot of exposure to it probably see the press release and some of the news and don't necessarily have a good impression in terms of how that will impact them I think the idea, though that they understand is our ability to leverage the employee record and then be able to help other challenges that are disconnects.
Our organization is already so communication between HCM and a financial platform is a point of disconnect that we've heard from our customers you see us addressing that with the head count planning solution.
The concept of being able to manage spend data, where I can as a manager approve spend in the same spot and we're proving time off is pretty interesting to them. So I think they get it conceptually. We certainly are not at the point in time, where we've rolled anything out to current clients, but we're excited about the concepts and the reaction that we're getting I think the second thing I would say to you is.
We do have a subset of mutual customers, it's not a huge number but we have spent time talking to those mutual customers and they are providing us feedback and are even more excited about the opportunity that they will have as we continue to integrate the platforms.
Speaker Change: Okay.
Speaker Change: With regards to the performance during the quarter I mean, the margin improvements really impressive I'm wondering if you can just talk about a little bit more about the leverage areas that you would expect over the course of the year.
You certainly saw leverage in terms of sales and marketing and G&A G&A, we always expect with how are we thinking about the sales and marketing.
Speaker Change: And then and then.
Speaker Change: Gross profit margin.
Speaker Change: Ex float.
Hey markets Ryan So I think to your point really pleased with the results in Q1 270 basis points of adjusted EBIT leverage ex float I'd add too on free cash flow as you look out over the last 12 months free cash flow margin of about 23%. So that's up nicely over the same period over the prior year.
I'd expect to see Leverages is largely consistent with what we saw in Q1, So 60 basis points of gross margin leverage I think that's an area that we continue to see opportunities to scale, both through general efficiencies as well as automation G&A to your point is one where we would expect to see leverage annually as well and I think sales and.
Speaker Change: <unk> and R&D are not necessarily areas that we look to drive leverage, but I think as we approach $1 billion five of revenue moving towards $2 billion were certainly thoughtful on customer acquisition costs and prioritizing investments because I think at that size and scale expectation would be that you're mindful of each of those items. So wouldn't put those at the forefront necessarily.
Speaker Change: Wouldn't surprise me, if we did see some efficiencies there as well.
Speaker Change: Terrific. Thank you.
Thank you and one moment as we move on to our next question.
Speaker Change: Our next question is going to come from the line of Daniel Jester with BMO capital markets. Your line is open. Please go ahead.
Great. Thanks for taking my question, maybe to stick with the air base fee.
And maybe attack it from all the different angle. So I think in the past when you launch new products. I think you said the goal is to try to get it into 10% to 20% of the customer basis and a few a few years of launching as I think about airbase does that have the same characteristics of the ability to <unk>.
At that same velocity or is there are significant differences in terms of how we should thinking about cross sell momentum in the future.
Yes. So I think you stated it very accurately we definitely like to target between 10, and 20% penetration over several years.
Speaker Change: Airbase has a more substantial company and has.
Speaker Change: Hand alone customer base, and so there's certainly an opportunity to continue to grow that.
But we definitely believe the big opportunity is the nearly 40000 customers that we can sell back to and so if we were to fast forward. Several years from now and we saw that 10% plus penetration number that would be a big success and that it might take a little longer than that several years, but we definitely think over time getting into that 10% to 20% target is certain.
<unk> feasible and something that we're going to focus on.
Okay, that's great and then and then Ryan maybe just on the air base revenue.
Maybe help us think about sort of.
Subscription component versus the transaction component and maybe how they are growing in.
Speaker Change: How does that affect maybe your forecasting ability of the business going forward. Thank you.
Speaker Change: Sure. So I think part of the integration work that we're doing is obviously working closely with the FAA team at Air base and I think we have spent a lot of time with them over the last months. So feel very comfortable about how we're able to model and truly incorporate that business into all of our.
Planning broadly, but certainly relative to guidance. So nothing I would point out there relative to concerns I think as we talked about over the last call. It 60 days or so that business has grown nicely historically and continues to do so.
Speaker Change: As we go further into the year I think we will be able to provide some incremental color, but able to factor in the trajectory of the business to date, both into revenue and profitability guidance I think the other thing to note is that business is largely software fee based revenue versus other models that you might be familiar within the industry, which I think makes ryan's comments, even more manageable.
Great. Thank you very much.
Thank you and one moment as we move on to our next question.
Our next question is going to come from the line of Jared Levine with TD Cowen. Your line is open. Please go ahead.
Jared Levine: Thank you in terms of the Airbus can you talk about how much incremental expansion of your existing $19 five HC 1 billion.
Jared Levine: This drives.
Speaker Change: Yes, I think so a couple of points. One is I think one of the key is as we've talked about was the.
Two fold expansion of the Tam into the office of the CFO, which I think has been a.
Speaker Change: Which has been an area that's been really attractive from.
From a software category standpoint, and I think going back to some of Steve's comments I think our ability to take the time now that we've closed on the transaction to integrate that product set into our platform will give us the ability to.
As noted both add new clients to the platform and then the bigger opportunity of going back into the customer base I think one of the other things that we've talked about as well.
We continue to believe we have the opportunity to expand.
<unk> as we have done from an HCM standpoint.
Speaker Change: But I also.
The opportunity to expand the Tam is certainly a focus of going into the office of the CFO and a focus of the acquisition of Airbus Air Base, and then building those products into the platform. The the revenue model is slightly different from a <unk> perspective, and so I think one of the things that we'll be working through as we integrate the business is what does that pricing.
Model look like and how.
How to factor that in in terms of how we're talking about the.
The Tam that we're focused on both from an HCM standpoint, and from a spend management or from a finance application standpoint, and I think thats part of the work that will that we are doing in the course of the integration effort.
I would add is.
This is a meaningful product in terms of the revenue per customer opportunity certainly more meaningful than any module addition that we've had in the past.
So that is also part of what excites us about the opportunity.
Speaker Change: Got it and then your partner marketplace was an area of highly the elevate conference can you just give us how material partner drive marketplace revenue is currently and how large do you think it can become over the medium term.
Yes, I think it's important to us and a couple of different ways. One is.
Speaker Change: <unk>.
Our approach from from a platform integration perspective, I think has been differentiated in the industry I think that is.
It's a significant value add from a client standpoint, the ability to have an open platform where you can.
Great third party products, whether thats.
Moving data between for example, our platform and our carrier or and other benefits.
Speaker Change: Related.
Product is something that our clients see us really valuable I think that's also really important for our channel partners again more than 25% plus of our more than 100% of our new business is referred to us from from channel partners, which is in large part brokers and so I think there is a there's a number of things that are really important to us.
Speaker Change: Our strategy perspective in terms of how we've approached.
Our marketplace and our integration efforts more broadly and I think that's been a really impactful contributor to not just our revenue growth, but to our client satisfaction and the differentiation that we've been able to drive.
From a competitive perspective.
Speaker Change: I would just add one other point as you think about marketplace.
Toby highlighted a lot of client value points, Theres times, where we may monetize some of that would be a partner revenue streams. There's other times, where clients are paying for functionality and so it's certainly a mix of that and we view that as really a core part of the solution that customers are selecting versus some sort of separate carve out from a revenue stream perspective.
Speaker Change: Got it thank you.
Speaker Change: Thank you and one moment as we move on to our next question.
Our next question is going to come from the line of Brian Peterson with Raymond James Your line is open. Please go ahead.
Brian Peterson: Thanks, gentlemen, and congrats on the strong quarter.
Wanted to ask you another way to look at Airbus I'm curious what most of your customers are using or how to think about it we've got greenfield opportunity as you look at the 40000 customers you have today any perspective on that.
Yes, sure I don't think we have perfect data, but we certainly understand the market as a whole before kind of entering that space. There still is a fair amount of managing this spreadsheet through manual processes and you think about maybe the core part of our marketplace and our average sized customer as you get to larger customer size then.
They may be using different software solutions, either add onto an ERP or some separate solution to be able to manage that so it was definitely a bit of a mix. We think there's real opportunity to be able to provide differentiation. When you really combine that with the HCM data and so certainly those.
Those that have not automated yet are obvious customers, but also those that might have a series of several solutions put together to try to get to the same objective and the idea of coming to a single platform, we think can be attractive to them as well.
Speaker Change: No that makes sense and just a follow up.
On AI I'm curious how big of a swing factor. The features are the roadmap really is at this point in terms of competitive dynamics.
Just becoming table stakes or is this still kind of viewed as maybe a nice to have element at this point.
Yes, that's a great question.
I think you have to really get down to the value that's being driven from the implementation of AI across your platform and they get down to really practical examples for customers. So is it going to be easier for me to find reports across the system can I get the answers to the questions that I have superfast and much easier than I have before are you providing me the embedded writing assistance that I.
Be able to really save time on and so I think I think there is lots of conversations broadly around how am I can snap your fingers and have a big giant change, but it's really an evolutionary change. So all of our product teams really try to think about ways that they could use platform capabilities and AI to really improve the client experience and then when you start demonstrating those experience to customers and they.
Start seeing the time savings the incremental insights they can get from that that's where the value derives versus having maybe just.
Speaker Change: Well I think the chatbot that does all of it it's got to appear differently to the customer and so the way we think about is embedding this across the platform.
Speaker Change: And really trying to drive value back to the customers and you see that with our most recent introduction of a chatbot, it's really going to allow them to get answers to their questions right at their fingertips, we don't want to take away the service component of our offering but there's times, where that's just convenient for a customer in that self service capability is going to create better satisfaction and so we just think that AI is not as.
On its own but an embedded part of our platform.
Great. Thanks, Steve.
Thank you and one moment for our next question.
Our next question is going to come from the line of Terry Tillman with true Securities. Your line is open. Please go ahead.
Terry Tillman: Yes, gentlemen, thank you for taking my questions and congratulations on the quarter I guess the first question is as you're all kind of looking into the selling season, you have a very large sales force you've got a building pipeline is there anything thats different kind of in the selling season from a target customer persona in terms of maybe the average size of these deals in your pipeline versus the last couple of years.
Terry Tillman: Thank you your crossover like 150, plus employees in terms of average customer size is there anything different in terms of kind of the makeup of the pipeline this year versus maybe prior years and then a follow up follow up.
Yeah, I mean, I don't think theres any fundamental difference Terry I mean, I think the one call out that we've made pretty consistently over the last.
Speaker Change: Call. It two to three years is just the extent to which we've continued to see success and traction slightly upmarket from where we've been which we've talked a lot about I think that's that continues to be the case and continues to be true and I think we're we've seen I think over the last number of quarters. We've seen we've continued to.
See traction in performance there so that's.
That's less of a new this quarter call out more of the trend that we've seen pretty consistently.
On a pretty even trajectory over the course of the last two to three years and I don't think theres any different persona involved or anything I think it's just that's.
That continues to be the case and is the trend over the last couple of years.
Speaker Change: Okay got it thanks for that and just a follow up last year I think it was really well balanced in terms of where the growth was coming from on the customer side and then the average revenue per customer.
Speaker Change: Are you thinking about this year or is it a pretty even balanced 50 50 this year and at the same time. When you are signing these new deals do you assume a higher attach rate of other products at point of sale versus last year. Thank you.
I think it's been we did see it fairly well balanced and last fiscal year and I think that was.
That was essentially our stance coming into this this fiscal year was the assumption that it would be relatively well balanced again.
Obviously that changes a little bit year to year and it also changes a little bit quarter to quarter, but I think on balance we would.
Speaker Change: We would we would see that trend continuing from from last fiscal year.
Speaker Change: Thank you and one moment our next question.
Our next question is going to come from the line of Merrill Lynch with Barclays. Your line is open. Please go ahead.
Hi, This is Sheldon mcmeans on for Raimo. Thanks, Thanks for taking our question I wanted to ask about the elevate conference.
Can you speak to activity and engagement coming out of the event and perhaps how this compared to last year.
Speaker Change: Yes, I mean I think.
First of all just this is always a great event. It was again this year really pleased with the attendance which was.
Up from last year, and we had.
Also really pleased with the breadth of attendants from a roll perspective, we had.
Attendance from HCM or HR finance operations teams really across the spectrum from our from our clients in terms of the roles that are represented and it's always a great opportunity to both connect with our customers and give them a view of what we're doing that's new and different for the year be able to connect on new products and overall just drive a higher level of <unk>.
Speaker Change: Activity engagement with our clients, which I think was was also a focus for this year and overall, we're really pleased with how the conference turned out and I. Appreciate it all the attendance we had from our clients and all of the all the work went into it from from an employee standpoint. So overall really pleased with the success of it again this year.
Speaker Change: Great and I also wanted to ask about airbase.
Is there a sweet spot in terms of the target customer within your base, perhaps by by size or industry. It does seem from your earlier comments that your whole customer bases addressable but was wondering.
Speaker Change: In particular, if airbase could help you move up market as I would imagine.
Some of your larger customers would be using our solution, perhaps sure. Yes. So I would tell you one of the things we really liked about airbase as the customer size overlap in terms of our average sized customer.
So obviously they don't have the number of customers, we do but there when you look at their average size. It was very close to our average size and so that's where the meat of our customers. Obviously lie that is part of what gives us confidence that we can get to kind of those those.
Speaker Change: Milestones in terms of 10% to 20% penetration over the next several several years.
Speaker Change: So that's good I think the other thing I would say is airbase has also been on a very similar journey that you would see with any products that we've released which is you start by going after that average sized customer you get customer feedback and based on that customer feedback you make those products, even better and they typically as they get better they get stronger as you move up market, we've seen that with pretty much every module we've released.
I think air rates has also been on that exact same journey. So I think the near term opportunities at the core of our marketplace and then over time, if we execute the same playbook, we have with other other products, we'll be able to gradually move that size up over time as well.
Excellent. Thank you.
Thank you and one moment our next question.
Speaker Change: Our next question is coming from the line of city Pentagon with Mizuho. Your line is open. Please go ahead.
Hey, this is Phil on for city, just I joined late so sorry. If this was already asked but how much of your growth is coming from new versus existing versus cross selling to the existing base and are there certain products that you are seeing more traction with when you're selling to the base.
Yes, I think we've seen the state of this few minutes ago, but I think we've seen a pretty even balance.
Through last year and coming into this year in terms of new clients and then increase in <unk>. So that's been fairly well balanced and I think I would also say just as it relates to the mix I think we've seen solid contribution from both new business and back to the base as we came through last year, including through Q4, and I think thats remained fairly consistent.
Through the course of Q1 and that's that's also our expectation as you look out into <unk>.
The remainder of fiscal 'twenty five.
Speaker Change: Would add if you look at the last cohort of products that we added over the last 18 months or so I think we're pretty happy with the performance across the board of those products as they kind of ramp into the target zone. The penetration that we've had for them, so whether that scheduling plus or market pay or rewards and recognition or employee voice those are all really ramp.
Speaker Change: Nicely for us.
Speaker Change: Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Yeah.
Speaker Change: Our next question comes from the line of Jay <unk> with William Blair. Your line is open. Please go ahead.
Yes, thanks for taking the questions just on the airbase front can you talk about some of the learnings you've had with your earlier products in the office of the CFO and just your ability to address that type of buyer that influence the deal or that you may actually do differently as you enter the market this time around.
Yes, sure obviously, the CFO is going to be different persona than you'd see in HR, it's not a new persona for us. Its certainly somebody that is often the final person that might sign the deal.
When it comes to HCM.
Speaker Change: As you think of our core market, the 100 or 150 employees. They oftentimes are involved in those meetings and very much sit through the demonstration and our key decision makers.
It's not brand new for Us, obviously thats not there maybe primary domain that theyre running although there are times that payroll reports into the office of the CFO, but you definitely see theres an element of ROI. There is an element of making sure that.
They're going to get adoption of the products to be able to drive the value. There is certainly an idea of managing cost and controlling expenses and so we think all of those really key important things that a CFO is focused on our key elements of what airbase as offerings. So we think that as we integrate the products that's going to tie pretty nicely into our process.
Speaker Change: We don't know whether how much of that is going to happen at the first time, we bring on new customers and how much of that is going to be selling back to the client base. We've had great success in selling back to the client base. So we feel pretty confident that we can kind of.
Figure that one out but it isn't a brand new persona for us we feel pretty confident we can we can work pretty well with CFO buying and decision making process.
Speaker Change: Okay helpful. And then can you just talk about the early feedback you've gotten for for your AI assistant and just the ROI that customers are seeing with that and I know, it's not being sold as a separate SKU today, but are you seeing any green shoots on the AI front that could be product ties and moving forward.
Yes. The last part first I don't think we really focus on trying to develop a monetize able solution from an AI perspective, and I think the reason is we've seen so many opportunities to be able to embed AI capabilities across our entire suite and really add value and create differentiation in the marketplace and so from a chat.
Speaker Change: My perspective.
Speaker Change: We see a couple of big opportunity. So first its ability to answer questions really quickly for our customers and sometimes its questions that maybe they wouldn't normally call floor I just need a quick answer I forgot how to do something I'm doing something very much for the first time Superfast Super easy very direct.
The feedback we've gotten and the beauty of AI as all of you know as we get feedback from the customers. So we get our answer rate continues to improve the more interactions you get with the customer and the more that we continue to add data to the model. So we're really excited about the early trajectory.
Of that product the second opportunity as we think about longer term you can also think about answering employees questions. So HR departments get a lot of questions from employees.
Speaker Change: So the more questions that you can offload from an HR perspective, we think the more value that you can add from a customer as well. So those are the two primary use cases, we've gotten positive feedback from customers.
Thank you one moment as we move on to our next question.
Our next question comes from the line of George <unk> with Citi. Your line is open. Please go ahead.
Hi, Thanks for taking the question I'm on for Steve vendors.
Speaker Change: Wanted to ask one of your mid market players in the space called out elongated deal cycles earlier.
Earlier. This morning are you guys seeing anything on that front or maybe just any comments on how rep productivity is trending more generally.
Yes, I think thats a topic that we've certainly talked about over the last going back probably three or.
Speaker Change: Four quarters at this point.
And I think our comments had been at the time that we had started to see some elongated sales cycles, particularly at the top end of the market.
Speaker Change: And I think as we came into Q4, our comment was that.
That head, we've seen stability, there and I think that would probably still be the comment today I think we have seen that but it's pretty stable at this point.
And not really any callout to make on a quarter to quarter basis versus where we would've been in Q4.
Okay, Great and then on air base and as move into the office of the CFO. I mean, you bought an asset that has a pretty broad product set already.
When you think about your long term vision ambitions in this space do you feel like this gets you most of the way there or should we think about this as kind of a first step in a bigger journey.
Yeah, I mean, it is a pretty.
Speaker Change: Broad platform that handles a number of pain points for customers in that category.
I think first mission for us is integrating the platforms.
Speaker Change: Driving.
Speaker Change: Back to the customers and then obviously driving volume after that and so I think we're pretty focused on that we're open to new opportunities. So I think if you think our client journey has always been client as a co creator so we're going to get feedback through that as we scale customers, we're going to find new opportunities those new opportunities.
Speaker Change: Certainly be largely already organically building on top of that and looking at new opportunities, but we're open in highly selective to look at.
External M&A opportunities if they present themselves, but I think right now we're very much focused on this being.
Speaker Change: An important first step.
We also have their head count planning solution module that launched in January so that does give us another product in that category as well so.
Certainly opportunities to expand it is a big category and it's one where we really want to focus on the HCM data providing leverage.
Speaker Change: Got it thanks for taking the questions.
Thank you our.
Our next question.
Our next question is coming from the line of Arvind <unk> with Piper Sandler. Your line is open. Please go ahead.
Speaker Change: Thanks for taking my question.
Speaker Change: I just wanted to ask about your.
Speaker Change: Yes.
Speaker Change: Fully arrays.
It was a fully or is kind of largely incorporating air base and <unk> performance.
Speaker Change: Or is it being able to raise.
Speaker Change: Further more than that.
Hey, Arvind, it's Ryan I think as I mentioned earlier and noted in the prepared remarks as well I think there was a couple of factors on the raise to the year. So one was certainly the $5 million we saw on the recurring side in Q1.
Speaker Change: And then we took a further raise for the momentum we're seeing across the sales organization headed into this selling season and then the third piece would be would be air base I think the size of those.
Two thirds of the raise so the two thirds of the $22 million, we raised on recurring would be air base and the remaining one third roughly would be organic revenue that we raise to the year.
Speaker Change: Right right and then.
Speaker Change: So kind of highlight.
Speaker Change: The demand environment feels good channel performance.
Speaker Change: Isn't it.
Speaker Change: What that means.
If this kind of environment continues then you could see for the upside.
I'm just trying to kind of thinking of you then.
Of your full year guide.
Speaker Change: What's assumed from a.
From an environment perspective from a macro perspective.
Sure Yeah, I think as we called out when we initially provided fiscal 'twenty <unk> guidance in early August that our desire was to get back to a beat and raise cadence and I think we obviously did that here in Q1 and feel good about the momentum across the business. So I think our view would be if we continue to see solid execution that we continue to be in a position where we'd be.
Able to beat and raise guidance as we move throughout the year I think from a macro standpoint Q1 came in modestly better than expectations as I mentioned earlier the vast majority of the beat that we saw in Q1 was really driven off of sales momentum, but modestly better than expectations. So we factored that into guidance. Although I think we continue to be an spa.
Speaker Change: <unk>, where we're being pretty prudent and thoughtful relative to the macro so have not gotten particularly the aggressive aggressive there. So if we see continued trends as we saw in Q1 that may result in a bit of upside over the balance of the fiscal as well.
Speaker Change: And just last question.
Speaker Change: Just on AI.
Really good updates here.
As you look out over the next couple of years, what do you anticipate like making a meaningful step up in.
The kind of investments with AI as you look to expand.
You're offering to your clients are.
You feel pretty good that they will continue with the.
Speaker Change: And a similar spend level.
Sure Yeah, I think we've had a pretty consistent spend level in R&D, it's not a place that we necessarily look for much leverage we feel like we.
Need to be able to continue to invest in product differentiation. We started a data science team that produces.
Our <unk> offering almost five years ago, and so its not brand brand new investment for us and it's one that we've obviously expanded as we've seen incremental use cases, and so I don't think that we foresee any reason to need some outsized sort of step up expense. We think we can fit our AI investments into the existing forecast that we've provided and that we can continue to innovate it.
Speaker Change: At a pretty accelerated rate based off what we've already created and the capabilities that we have internally.
Speaker Change: Perfect.
Thank you very much.
Thank you one moment our next question.
Speaker Change: And our next question comes from the line of Jason <unk> with Keybanc capital markets. Your line is open. Please go ahead.
Speaker Change: Great. Thanks for fitting me in.
Speaker Change: Thank you.
Talking about it yet, but like why did you see in terms of employment levels on our platform in the corner and then are you kind of accounting for further degradation through the year just curious what you when you have there.
Sure Hey, Jason It's Ryan I think we saw.
Ryan: Modest upside versus expectations in Q1, I think we've continued to see resiliency with within the client base from a workforce level standpoint, so that provided a little bit of upside into the quarter. We have not really assumed any further acceleration over the balance of the year, so year over year, you'd likely see workforce levels up modestly.
But I think we continue to take a fairly cautious and prudent approach and we'll obviously update guidance as we go throughout the year to the extent, we get further evidence of stability, but so far I feel good about where that trended in Q1, and we'll obviously update you after the second quarter.
Speaker Change: Okay excellent and then we near answering <unk> question, you talked about good sales execution.
Curious if you've seen any changes in the competitive environment, obviously, a different companies are navigating. These these current conditions differently. So.
Any changes to win rates or anything there.
I mean, I think as we've said many times before I mean, the environment has always been competitive and continues to be but I will.
I will say again, I'm really pleased with the execution that we've seen with our go to market teams across sales and marketing and then also with our with our channel initiatives continuing to drive more than 25% of new business coming from our our channels and so I think overall as we're really at the heart of selling season right now feel really good about the execution that we saw in Q.
One that's what provided.
The upside to the quarter and I think we're encouraged by what we see in terms of the execution as we go into and through selling season.
I think that's really the core of our focus right now as we sit here at the end of October Okay. Perfect. Good stuff. Thank you.
Thank you and I would like to hand, the conference back over to management for any closing remarks.
Just wanted to say a very happy Halloween to everyone and thank you. So much for your interest in Pelosity and thanks again to all of our employees for helping deliver a strong quarter. Thank you very much.
This concludes today's conference call. Thank you for participating you may now disconnect.
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