Q2 2025 Paylocity Holding Corp Earnings Call
And press pound when finished.
We're 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.
Speaker Change: In regard to upcoming conference schedule I will be attending the Wolf software conference Toby and I will be attending the Raymond James Institutional investors conference and Toby will be attending the Stifel technology. One on one conference. Please let me know if you'd like to schedule time with us at any of these events with that let me pass the call over to Steve.
Steve: Thank you Ryan and thanks to all of you for joining us on our second quarter fiscal 25 earnings call. Our strong results continued in Q2 with recurring and other revenue growth of 17% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace total revenue grew 16% over Q2 of.
Speaker Change: Last year.
Speaker Change: Our sustained multi year investment in R&D has resulted in strong product differentiation and significant expansion of our product suite, which has helped drive durable revenue growth and expanded average revenue per client.
Speaker Change: The recent launch of benefit decision support and our expansion into the office of the CFO with our integrated head Count planning product has increased our Max P. P Y from $550 to $600 achieving the target we set in August 2023, and this does not yet include any air based products. We also remain.
Speaker Change: Confident in our ability to drive further product expansion and further expansion of our average revenue per client across new and existing clients with new HCM and office of the CFO products overtime.
Speaker Change: Additionally, our new AI assistant Chatbot is now generally available to all Pelosity client admins, and we're pleased with early levels of adoption.
Speaker Change: Since launching in October we've seen a 30% increase in utilization and key features such as natural language search capabilities, which are available in our reporting product have driven an over 20% reduction in time required for our users to find reports we are encouraged by the benefits our AI related investments are driving for our clients and <unk>.
Speaker Change: Excited to continue adding additional AI enabled functionality and key use cases over time.
Speaker Change: Our ongoing commitment to product innovation continues to be recognized by third parties. As Pelosity was recently awarded the trust radius Buyers' Choice Award and named overall leader in 10, HCM product categories in <unk> Winter 2025 grid reports.
I would now like to pass the call to Toby to provide further color on the quarter.
Toby: Thanks, Steve as Steve highlighted the momentum seen in Q1 continued into the second quarter, resulting in solid selling season performance and increased revenue and profitability guidance for fiscal 'twenty. Five our results are driven by strong sales and operational execution continued product differentiation and a more stable macroeconomic environment.
Toby: We also continue to be pleased by our ability to add talented sales reps and solution consultants and our ongoing investments in training and development across our sales team helped contribute to another quarter of strong go to market execution, including continued traction upmarket.
Toby: Additionally, we are pleased to see another quarter of strong performance across the broker referral network, which once again delivered more than 25% of our new business in Q2.
The sustained success of our broker channel is driven by our modern platform marketplace ecosystem third party integration and API capabilities and because we do not compete against our broker partners by selling insurance products, we remain committed to investing in and supporting the broker channel going forward with the goal of continuing to deliver real value and true partnership and support to our referring.
Toby: Brokers and clients overall, we are pleased with Q2 results and believe we are well positioned heading into the back half of the fiscal year, which is reflected in our increased guidance for fiscal 'twenty five.
Toby: While still in the very early days, we're pleased with the reception of the airbase acquisition from both existing and prospective clients and we will continue driving the integration process across our teams and our platform.
Toby: From our early conversations the value proposition of having a single platform through which all payroll and non payroll related spend can be managed with a robust set of integrations with key third party systems is resonating with decision makers across our target market.
Toby: We're also pleased with the ability to collaborate with mutual clients to drive a combined roadmap that delivers incremental value to businesses across our target market.
Toby: Finally, this time of year is a very busy time for all of our teams as they work closely with clients on year end processing of Payrolls W. Twos, 10, 90, fives 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 time of year.
Toby: The strong culture of Pelosity also continues to be recognized externally as we recently were named to Forbes list of Americas. Most trusted companies in Fortune's list in 2024 best workplaces in technology. In addition to being recognized as one of America's Greatest places for workplaces for diversity by Newsweek for the second consecutive year I would now.
Toby: The past called Orion to review the financial results in detail and provide our increased fiscal 'twenty five guidance. Thanks, Tobey Q2 recurring and other revenue was $347 7 million an increase of 17% with total revenue of $377 million and up 16% from the same period last year. Our strong Q2 results were primarily driven by.
Toby: Another solid quarter for our sales team, allowing us to come in $8 million above the top end of our revenue guidance and resulting in a raise for our fiscal year guidance by more than our beat for the second consecutive quarter. Our adjusted gross profit was 73, 8% for Q2 versus 72, 7% in Q2 of last fiscal representing a 110 basis points of leverage as we can.
Toby: To focus on scaling our operational costs, while maintaining industry leading service levels.
Toby: We continue to invest in research and development and to understand our overall investment in R&D. It 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 16, 2% when compared to the second 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 <unk>.
Toby: <unk> a platform to serve the needs of the modern workforce.
Toby: In regards to our go to market activities on a non-GAAP basis sales and marketing expenses were 21, 7% of revenue in the second quarter and a non-GAAP basis G&A expenses were nine 8% of revenue in the second quarter and we remain focused on consistently leveraging our G&A expenses on an annual basis.
Toby: Our adjusted EBITDA for the second quarter was $126 2 million or 33, 5% margin and exceeded the midpoint of our guidance by $8 2 million, excluding the impact of interest income on funds held for clients. Adjusted EBITDA was $96 9 million also exceeding our guidance for Q2.
Toby: Briefly covering our GAAP results for Q2 gross profit was $252 4 million operating income was $46 6 million and net income was $37 5 million.
In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $482 4 million and $325 million in debt outstanding related to the funding of the airbase acquisition.
In regard to client held funds and interest income our average daily balance of client funds was approximately $2 8 billion. In Q2, we are estimating the average daily balance will be approximately $3 2 billion in Q3 with an average annual yield of approximately 360 basis points, representing approximately $29 million of interest income in Q3 on a full year basis.
We are estimating the average daily balance will be approximately $2 9 billion with an average annual yield of approximately 390 basis points, representing approximately $113 million of interest income in regard to interest rates. Our guidance reflects all fed cuts to date with an additional 25 basis point rate cut assumed in may.
Toby: Additionally, given the confidence we have in our business and our strong cash flows. We continued to utilize our share repurchase program with $8 6 million or approximately 40000 shares of common stock repurchased in Q2 at an average price of $197 90 per share as a reminder, we have approximately 341.
Toby: Million remaining under our share repurchase program and anticipate continuing to execute against the program over the remainder of the year.
Toby: Finally, I'd like to provide our financial guidance for Q3 and full fiscal 'twenty five note that as a result of strong selling season and continued momentum across our sales team. We are increasing our fiscal 'twenty five recurring and other revenue guidance by $15 5 million and our total revenue guidance by $25 million at the midpoint, which includes the full impact of our <unk>.
Toby: <unk> beat in Q2, and a further increase in back half fiscal 'twenty five revenue guidance <unk>.
Toby: Additionally, we continue to realize success driving increased profitability across our business, resulting in increased adjusted EBITDA guidance, which includes the full impact of our guidance beat in Q2 and increased profitability expectations for fiscal 'twenty five.
Toby: With that said for the third quarter of fiscal 'twenty five recurring and other revenue is expected to be in the range of $410 million to $415 million or approximately 12% to 13% growth over third quarter of fiscal 'twenty for recurring revenue.
Toby: And total revenue is expected to be in the range of 439 million to $444 million or approximately 10% growth over third quarter fiscal 2000 and for total revenue.
Toby: Adjusted EBITDA is expected to be in the range of $171 million to $175 million and adjusted EBITDA. Excluding interest income on funds held for clients is expected to be in the range of 142 million to $146 million.
Toby: And for fiscal year 2005, we are increasing all aspects of our guidance as follows recurring and other revenue guidance is now expected to be in the range of 144 5 billion to $1 four of $5 5 billion or approximately 13% growth over fiscal 'twenty four recurring and other revenue.
Toby: Total revenue guidance is expected to be in the range of $1 $55 8 billion to $1 $5, $6 8 billion or approximately 11% growth over fiscal 'twenty for us.
Toby: Adjusted EBITDA is expected to be in the range of 542 million to $550 million and adjusted EBITDA. Excluding interest income on funds held for clients is expected to be in the range of $429 million to $437 million.
Toby: In conclusion, we are pleased with our Q2 results and the momentum we have across our sales and operations team as we exit our busiest time of the year. Operator, we are now ready for questions. Thank you 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.
Toby: Due to time restraints, we ask that you. Please limit yourself to one question and one follow up question. Please standby, while we compile the Q&A roster.
Toby: Hello.
Speaker Change: And our first question will come from the line of Brad Reback with Stifel. Your line is open.
Brad Reback: Great. Thanks very much.
Speaker Change: Not sure who it's for but.
Brad Reback: With.
Brad Reback: Okay.
Brad Reback: And the market.
Brad Reback: Okay.
Brad Reback: Now they clearly had a big broker channel, they're now going to be competing with those brokers do you see that as an opportunity to accelerate your your brokers go to market.
Brad Tobey: Hey, Brad Tobey.
Brad Tobey: If you look at what's made us successful over time with the broker channel. It's been the investments that we've made to build those relationships to provide meaning.
Brad Tobey: Meaningful technology to them visibility into their business, it's being able to provide integrations that matter and ultimately I mean, we don't compete with the broker channel with the sale of insurance products and so I think those are the things that have made us successful and helped us build meaningful relationships with that channel and I think thats.
Brad Tobey: That's what we want to be able to do as we look forward and I think if there's any disruption that comes from a deal like that that's that that's where.
Brad Tobey: Where we want to be positioned to be able to provide those types of relationships with brokers that are successful.
Brad Reback: And just a quick follow up on that Tobey as you build broker relationships does it typically take months quarters or longer to get them productive.
Brad Reback: Well I think a lot of the relationships that we have have been built over time with our sales force in the field and I think when those when those relationships exist they tend to be productive.
Brad Reback: It doesn't take years to get them to be productive, it's all about our ability to bill.
Brad Reback: Build those relationships make the connection and then being able to communicate the value that I just ran through and when we can do that we can usually make those productive in the near term.
Brad Reback: The other thing I would mention that Brad just to add to that is yes, no prompt is oftentimes the broker relationships are not necessarily exclusive meaning.
Brad Reback: They might refer to pelosity, they might refer to somebody else. They may in different circumstances use multiple providers, we obviously want to be that premier provider in each of these relationships and so if there happens to be less competition in the market and less options available then I think to Toby's point, we feel like we're really well positioned since we've been doing that really from the various.
Brad Reback: Startup pelosity with a great reputation in the market to take advantage of that.
Brad Reback: Excellent thanks very much.
Brad Reback: Okay.
Brad Reback: Thank you one moment our next question.
Brad Reback: Okay.
Scott Berg: And that will come from the line of Scott Berg with Needham. Your line is now open.
Scott Berg: Hi, everyone nice quarter, thanks for taking my questions.
Steven Tobey.
Speaker Change: I guess as we track your pre scripted remarks, maybe this quarter and last quarter I get a sense that you have maybe a renewed sense of optimism in the business, we still get here.
You will recall payrolls properly and it seems like deal flows kind of stabilize a is that the right way to view some of your comments that you've made here today or is that maybe.
Speaker Change: Something I'll make it up in my head I guess.
Speaker Change: Well I mean, I think you I think we would hope that you will hear a lot of consistency in our approach. So I think we have always been optimistic about our ability to continue to grow and serve clients well.
Speaker Change: And yes, we're just talking about.
Delivering value to the broker channel and so I think that's been a pretty consistent approach from a strategy perspective and approach to the growth algorithm and I think you continue to hear that today and I think the.
Speaker Change: Steve and I, both have I think tried to communicate.
Speaker Change: Kate that over time, and I think that still holds true.
Speaker Change: Yes.
Speaker Change: Understood.
Speaker Change: Now that we're through your obviously busy selling season in the fall and.
Speaker Change: We're into calendar Q1, how do you think about sales hirings Gerry calendar.
Speaker Change: 25, as you start to think about 26, I know not all your plans or certainly made for next fiscal year, but when you think about sales capacity.
Speaker Change: Does it change much from how you viewed last year.
Typically when you start to hire or at least into the spring for the busy selling season.
Speaker Change: Yes, I think so if you go back to really the hiring season and coming into this fiscal year, we had come in growing sales head count.
Speaker Change: By round, 8% and what we talked about at the time was that we would that would be our starting point and the focus was really on driving productivity across our go to market teams and that if we saw a marked change in the macro I mean, we still would have room to be able to continue to invest throughout the course of the year if leaning in mid <unk>.
Speaker Change: And I think as we sit here coming through the first half I think we performed well in selling season, we feel good about the momentum that our go to market teams have had and we feel like it's been a more stable environment than we would have seen last year and so I think we feel good about the investments that we made coming into the year and still remain optimistic about our ability to.
Speaker Change: To be a destination for talent, particularly in go to market in the industry.
Speaker Change: When those opportunities present themselves we're ready.
Speaker Change: Excellent this quarter again, thanks for taking my questions.
Speaker Change: Thanks, Rob. Thank you one moment our next question.
Speaker Change: And that will come from the line of some months Yamana with Jefferies. Your line is open.
Speaker Change: Hey, guys. Thanks for taking my questions and good strong quarter. Just one note for my good friend, Scott Dumbledore aesthetic can be happening inside your head, but it doesn't mean it shouldnt be a real honor that so just to remember that Scott.
Speaker Change: So Toby.
Speaker Change: For you guys I wanted to ask about air base, and I know youre talking about the early impression that youre getting from customers that it's been well received I guess can you maybe just help us understand what are the customers that you have sold it to <unk> since the acquisition have you seen them by.
Speaker Change: Front, along with the rest of the suite or you see them are you seeing them engage in the conversation and put it as something down the road, maybe just help us understand what that level of receptivity has been and how that's manifested in the numbers.
Speaker Change: Sure. So obviously all understanding that this is still very early in integration number one number two airbase as still a relatively small.
Speaker Change: Revenue stream when you look at our overall business, but having said that we are pleased with the early indications in both scenarios first.
Speaker Change: Interactions with our sales team that are bringing clients on board upfront, we're seeing some activity there where customers are interested in having that conversation about how air based product solutions can help them as they look at modernizing their HCM suite. So some good examples there and then at the same time as we go back to our existing customers.
Speaker Change: And we talk to them about this acquisition and how we might be able to help them. We're also seeing some interest that's all being done as we are working on the product integration, which we think will only increase the value proposition over time. So I think we're happy early on with both the team that we brought over with air base and the early reception from the.
Speaker Change: Both our customers and prospects in the market.
Speaker Change: Great and then maybe a follow up for you any can.
Speaker Change: Can you give us idea of what the contribution from air base was in the quarter and just as I think about the upward revision to the guidance. Obviously, that's a really positive outcome and how much of an influence and airbase I'd have on that or was that all for the core business.
Speaker Change: Yes, I would think of the contribution from air base being consistent with how we sized it last quarter, which is roughly 1% of revenue or so this fiscal year. So to Steve's point I think that that business is performing as expected and relative to the overall businesses is fairly small so when you think about both the results in Q2.
Speaker Change: And the larger guidance raise in the back half of the year I would view that as really driven by core pelosity over performance.
Speaker Change: Excellent thanks, guys and congrats on a great quarter.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And that will come from the line of Mark Mark Hahn with Robert W. Baird. Your line is open.
Mark Hahn: Hey, good afternoon, Thanks for taking my questions and let me add my congratulations great quarter.
Mark Hahn: I'm wondering if you can talk a little bit about what youre seeing just in terms of.
Mark Hahn: The differences between the mid market relative to the upper end of your target market and the <unk>.
Mark Hahn: Past, you had talked about longer decision cycles and the upper end are you seeing any any change in tone.
Mark Hahn: What are you seeing in terms of receptivity are areas of strength.
Mark Hahn: And any areas that are more or less competitive.
Mark Hahn: Yes, Mark Tobey I think if you go back to this time last year.
Mark Hahn: We were talking about the fact that we had seen longer sales cycles, particularly in the upper end of the market and part of that was due to.
Mark Hahn: More.
Mark Hahn: I think cycles through with decision makers and seeing more demos etcetera things like that and I think as we came through the third quarter and then through the fourth quarter of last year. We also started to see a little bit more stability in the market and I think as we came into this year. That's really how we set the year up I think thats, what we saw through <unk>.
Mark Hahn: Q1, and I would say <unk>.
Mark Hahn: Stable through Q2, I don't think we saw any significant change in the dynamics in the market, but we did feel like it was more stable and I think coming through selling season really proud of how our teams.
Mark Hahn: We executed and I think they may carry some momentum from.
Mark Hahn: Q1 into Q2, and I think we didn't.
Mark Hahn: It was just strong execution quarter for the teams and selling season.
Speaker Change: That's great and then it sounds like both the benefits decision support and head count planning we're off to a good start can you give us a little bit more of a feel in terms of.
Mark Hahn: The level of receptivity.
Mark Hahn: How much are you getting in terms of new sales who's that appealing to particularly in terms of head count planning, which goes into the office of the CFO.
Mark Hahn: Anything there would be helpful.
Mark Hahn: Yes, So I think we're definitely happy with the start for head Count planning as you mentioned it is the first product in that office of the CFO category and being able to deliver that too.
Oftentimes, both new customers many of those who are starting in January and probably haven't fully taken advantage of head count planning, yet, but also back to the base and getting some of our existing customers, that's probably where we've got even more of the feedback from existing customers as they're going through an annual cycle going through their planning cycle.
Mark Hahn: They were able to use that tool to do better head count planning than they would've oftentimes I've been doing in spreadsheets and manually so off to a good start I think as you know Mark we always try to target these new products get them into the 10% to 20% penetration range over time get them off to a good start.
Mark Hahn: And I would say that's certainly the case with both these products I think the benefit decision support has a little bit cyclical nature to it benefit enrollment happens throughout the year, but it is a little bit more concentrated into the fall. So we were able to get some great feedback from customers that use that tool in the fall.
Mark Hahn: And we think we've got momentum as new customers are coming on and they plan on using our benefit enrollment to both throughout the year, but again. This fall that is going to deliver a much better experience for employees and also has some real nice value to brokers.
Mark Hahn: Excellent great job.
Speaker Change: Thank you one moment for our next question.
Speaker Change: And that will come from the line of Brian Peterson with Raymond James Your line is now open.
Speaker Change: Okay.
Speaker Change: Sure Brian.
Speaker Change: A question and so youre, saying that your PD lie has reached your target of $600 and <unk> III Cisco one is a high level thoughts on how you are now recalibrating rethinking about our new target going forward.
Speaker Change: Sure I'll take that so.
Speaker Change: So, yes, we're really proud of being able to reach that goal back in 2014 at IPO, we've tripled the amount of product that we've been able to sell and so we also see big opportunity for us to be able to do that the <unk> model is certainly one that works very well when you think of HCM products as we move into the office of the CFO some of those might not be that same pricing model.
Speaker Change: However, I don't think that changes the mix of new units and <unk> over time, so you'll see us continue to focus on that average revenue per customer growth, which might be priced a little bit different depending on the product category, but it's the same model that we've really kind of operated and so we'll have to give some thought in terms of how we discuss that on a go forward basis, but as.
Speaker Change: I mentioned earlier, we're still very early innings into the air based acquisition.
Speaker Change: And so I would expect more color over time, but no change in focus continue to drive more new products back to the existing customers and new customers continue to drive both units as well as <unk> as the formula for growth.
Speaker Change: Yeah.
Speaker Change: Got it.
Speaker Change: And then also speaking about Airbus a little bit I know, it's early days the integration, but little bit curious how youre thinking about next 12 months to 18 months the integration path.
Speaker Change: Are you <unk>.
Speaker Change: And our prioritization of integrating air based versus continuing driving these new product launches and continuing driving the penetration with existing products.
Speaker Change: Yes, I would say at our current scale.
Speaker Change: Roughly one $5 billion in revenue, we've consistently continue to invest a similar percentage back into R&D that has been part of our belief that the product differentiation is whats really driving the performance overtime and so we will balance the investments both in terms of enhancements and features to our customers with existing products new <unk>.
Speaker Change: <unk> products innovation capabilities with things like AI and then at the same time make investments into new categories. I think we've had a pretty good history of being able to do that have been first to market in many of those categories and so we feel like we're well positioned to be able to do that oftentimes in most of the time that's organic.
Speaker Change: In some cases, we've made some strategic acquisitions, where we think it is a great fit we spend the time to integrate that product. So the customer experience mirrors, something that we would build and <unk>.
We've got to continue to balance our portfolio of investments from an R&D perspective, but certainly increased size and scale allows us to do that.
Speaker Change: Got it thank you.
Speaker Change: Thank you one moment our next question.
Daniel Jester: And that will come from the line of Daniel Jester with BMO capital markets. Your line is open.
Speaker Change: Great. Good evening, everyone and thank you for taking my question Ryan.
Speaker Change: Great outcome on the EBITDA line, if I look at the free cash flow of the business.
Speaker Change: It doesn't look as expansive on a year over year basis. My guess is that airbase as kind of muddying the waters a little bit there.
Speaker Change: So can you help us think about the conversion of EBITDA to free cash flow for the rest of the year. If there's any puts and takes we should be considering as we're working through our model.
Speaker Change: Sure. Yeah, obviously, we don't guide to free cash flow, specifically and certainly quarter to quarter that number moves around with timing of spend so nothing that I would call out that would be concerning or one time to your point. There is obviously a headwind this fiscal year relative to the airbase acquisition with which we characterize as roughly 100 basis points <unk>.
Speaker Change: And for adjusted EBITDA, I think the headwind to free cash flow is pretty similar so when do you think where we are today on a TTM basis free cash flow roughly 21% margin.
Speaker Change: We do have the headwind over the balance of this fiscal year I think we will end up somewhere north of 20%. This year, that's not formal guidance, but I think when you look at where this goes going forward into 2006 and beyond we would expect to be able to continue to drive leverage going forward, but wouldn't have any specific concerns relative to Q2, just some timing of wind.
Speaker Change: When some of the cash flows hit within the year.
Speaker Change: Okay. That's great. Thank you and then.
Speaker Change: You've said in the past airbase is certainly going to be something that youre going to try to push back into the current customer base. It sounds like head count planning is also something that your current customers are very interested in as you think about sales investments going forward do you think about changing the mix between.
Speaker Change: <unk> sort of hunters and gatherers in your sales organization and.
Speaker Change: What could potentially that look like if you were to emerge. Thank you.
Speaker Change: Hey, Dan So I mean, yes, we have we've called this out over time and we have invested in both so.
Speaker Change: I think going back to 2000, probably 15 16 timeframe started to invest in our team to sell back into the customer base and Thats grown over the course of time. Since then I think the mix is continually shifted in terms of higher percentage of growth in that team that's selling back into the base relative to the field.
Speaker Change: I think to Steve's comments, a few minutes ago. The focus has absolutely been.
Speaker Change: From a go to market spend standpoint to focus on new units. That's a really important part of the growth algorithm, while also focusing on our ability to and investing in our ability to go back to the client base is our product set has expanded now to $600 in <unk>. So.
Speaker Change: It's certainly been a both have been important and that's that's some color on the mix.
Speaker Change: Great I appreciate it thank you.
Speaker Change: Sure. Thank you one moment our next question.
Speaker Change: And that will come from the line of Patrick Wall Ravens with citizens. Your line is now open.
Austin Cole: Great. This is Austin coal on for Pat Walraven.
Speaker Change: I appreciate you taking the questions nice results.
Austin Cole: The.
Speaker Change: More high level question here, but would love to get your your just general thoughts on the Paychex pay core deal why do you think paychex wants to buy a pick or how do you see this market evolving going forward.
Speaker Change: Yes, so certainly have no any inside information, but I think just from a macro perspective, there has been consolidation in this industry over time.
Speaker Change: As businesses that can drive pretty high margin, so as you're able to do that you can typically take some cost savings out I think they call. It some of that out in their press release in terms of targeting some cost savings I think pay core has focused a little bit of a larger sized customer than paychex historically.
Speaker Change: So I think you put all that together and that's at least what the rationale that I would think about and I think from our perspective, we're going to continue to do what we were doing before it's really about innovating, we fared very well against both those competitors.
Speaker Change: There are strong competitors for sure, but there is someone that we've had success with over time and so we feel like if theres a change in their strategy. If there is any type of disruption then that could be incrementally beneficial to us otherwise we're going to continue to do what we do.
Speaker Change: Deliver the most modern experience to our customers.
Speaker Change: Great I appreciate that perspective, thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: Yeah.
Speaker Change: And that will come from the line of city panel Guang with Mizuho. Your line is open.
Speaker Change: Thanks, and congratulations on an excellent quarter.
Speaker Change: Going back to Airbus again, so is your plan to run this independent.
Speaker Change: Independent.
Speaker Change: Group or even keep that.
Speaker Change: Product in the same form or are you planning to rebuild on the velocity platform before you go to your <unk>.
Speaker Change: <unk> customer base to cross sell this.
Speaker Change: <unk> My question when should we start.
Speaker Change: Thinking about cross sell opportunity.
Yes sure.
Philosophy.
Speaker Change: Yes, so I think stepping back from a long term perspective, our goal will be to integrate those platforms over time, so that we're delivering a very unified in holistic experience, where we will have all payroll dollars payroll activity approvals as well as all of the spend management capabilities that will certainly take some time having.
Speaker Change: Having said that our customers can still benefit from some of the integration that already exist and that we're going to be adding over time and so we will.
Speaker Change: To sell new customers, we will sell back to our customer base.
Speaker Change: In such a way that will grow over time and so as we go into next fiscal I would say throughout next fiscal and throughout the back half of next fiscal I would imagine we start to gain some momentum with the product integration it will be a multiyear effort.
Speaker Change: And the bigger opportunity from our perspective is really.
Speaker Change: We'll continue to grow Standalone revenue with an airbase, but the bigger opportunity is the cross sell and to your point that if you look at our history that will take US 12 to 18 months. This is a little bit larger acquisition wouldn't surprise me if thats more in the 12 to 24 months.
Speaker Change: But what I'm really happy about is even without all of the benefit that we're going to be able to deliver from a truly integrated platform. We are still seeing.
Speaker Change: Good receptivity from both prospects as well as existing customers so off to a really good start.
Speaker Change: That's great and then around a follow up to your guidance you had a pretty strong first half and if I look at your Q3 guidance. It implies that Q4 recurring revenue will be probably 10% or below is there anything that we should.
Speaker Change: Think about or is it.
Speaker Change: Contrary to some of you.
Speaker Change: Yes, I would probably characterize it I think a few different ways. If you step back and think about how we set up the initial guide for this fiscal year I think we were really clear that we felt like we wanted to return to a beat and raise cadence and I think we viewed it as if we had strong execution across the sales team and from an operational standpoint, we'd be in a spot.
Speaker Change: To be able to beat and raise and we're halfway through the year. We've raised both quarters, we've raised both quarters by more than the beat and I think within our guidance philosophy. Our view is while we have raised pretty significantly if we continue to see strong sales performance and you've heard from US here today relative to the momentum we feel like we have in that team that come may earnings call we'd be.
Speaker Change: In a spot to potentially raise again I think maybe the one thing I would call out relative to Q2 versus Q3 is while the vast majority of the over performance. We saw in Q2 was sales driven we did see pull forward of call. It a handful of million dollars of recurring revenue that we would have typically expected to see in Q3.
And that's really driven off of some clients starts that came in a little bit earlier so.
Speaker Change: Both new and some of the Upsells, we have two existing clients being able to get those in a couple of months earlier net positive I think both from our perspective as well as clients that get the product in the hands of clients earlier, the implementation process is smooth and for US. It's all recurring revenue. So we did see that slight pull forward between Q2 and Q3.
Speaker Change: When you think about the guide both third quarter ended the fourth quarter again, we feel like if we perform well we should be able to raise over the balance of the year.
Speaker Change: Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Raimo <unk> with Barclays. Your line is now open hey, Thank you.
Speaker Change: And congrats from me as well two quick questions first.
Speaker Change: Can you talk a little bit about the labor market, obviously remember last two.
Speaker Change: Actually it was almost a year before we had issues on your hiring et cetera have you seen any change, especially if you look at the small business index post election, that's kind of going up every week.
Speaker Change: Any improvement there or what are you seeing there in that market and I had one follow on.
Speaker Change: Yes, I think broadly speaking, we've seen a really stable macro and I think thats from a macro standpoint across the board within employees on the platform.
Speaker Change: As you know, we probably had a touch of conservatism or prudence into the guidance. We did not assume any increase and I'd say, there's probably modest upside to that in the first half of the fiscal year, not particularly material, but net net and overall positive I think relative to the guide in the back half of the year. We continue to take a prudent approach so to the extent you see a little bit of upside.
Speaker Change: There that would potentially provide some modest upside to revenue in the back half of the year, but overall, it's been pretty stable nothing I'd call out as particularly materially different versus expectations.
Speaker Change: Yeah, Okay, and then can we talk a little bit about gross margins Q2, obviously you saw a really strong.
Speaker Change: <unk> can you talk a little bit about the drivers there and how we should think about that going forward. Thank you.
Speaker Change: Yes, absolutely I mean, we've been pleased with the expanded gross margins, we had really last year, but certainly the first half of this fiscal year as well. So I think Q1 was a strong quarter and I think for us its continuing to balance investments across our operational team to make sure. We are driving that industry, leading service levels, but at the same time, we're working hard.
Speaker Change: To make sure we're prioritizing spend making sure that we're driving efficiencies and automation I think we've been able to balance that where we feel really good about where we are from a retention and implementation standpoint, but at the same time, we are able to take advantage of our size our scale and the fact that we're investing across people process and technology to be able to drive some pretty healthy margin leverage while.
Speaker Change: Having to sacrifice on the service side.
Speaker Change: Perfect. Thank you okay very helpful.
Speaker Change: Thank you and one moment our next question.
Speaker Change: And that will come from the line of Jared Levine with TD Cowen Your line is open.
Jared Levine: Can you discuss the level of client interest in your Gen AI functionality and thoughts on your ability to monetize in the future.
Speaker Change: Yes sure.
Speaker Change: As we mentioned in the prepared remarks, we were pretty happy with the launch of our internal chat bot that our customers are using so probably.
Speaker Change: The ability to really create a better experience overall and so we're seeing some pretty nice increases and we still want them be there for them when they call us or email us or interact with them, but it gives them really quick answers.
Speaker Change: Maybe built in advice over time, and so that's been really strong we've got a number of other use cases that uses generative capability things like writing announcements to all of your employees or job descriptions and we've got some things in rewards and recognition and performance and so our approach overall is really to embed the AI capabilities to really.
Speaker Change: Make everyday processes, even better for our customers. So sometimes that means faster sometimes that means higher quality, sometimes it means it's just much easier for them to be able to get their jobs done and we have a number of.
Speaker Change: Modules that we think we continue to enhance to do that we think that's the bigger opportunity both great service experience and differentiation embedded into the product from a longer term perspective, we will certainly keep our eye out for monetization opportunities, but from a near term, it's really client satisfaction efficiency and differentiation.
Speaker Change: Great and then in terms of retention can you provide some color on your January retention performance, just given the significance of that for the year and how that compared year on year and relative to historical levels.
Speaker Change: Yes.
Speaker Change: So as you know this is a really important time of year for us.
Speaker Change: With.
Speaker Change: All the volumes that are teams handle going into December and then through January for both the service standpoint, and from an implementation standpoint, and I would say similar to the remarks I made earlier about our success.
Speaker Change: Success in the selling season, I'm really proud of the efforts of our teams both in service and implementation going through and serving our clients really successfully in in December and January so.
Speaker Change: Obviously, we will.
Speaker Change: Kind of flush out how Q3 comes together, but I think sitting here today at the beginning of February really happy with that really proud of our teams and all the effort they put in to serve our clients in the busiest time of year.
Speaker Change: Great. Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Terry Tillman with <unk> Securities. Your line is open.
Speaker Change: Yes, Hey, good afternoon, Congrats from me on the quarter running out of questions ask them either relegated to Super Bowl picks or maybe an up market traction question.
Speaker Change: So I'll go for the latter so it doesn't get into a sensitive topic on picks.
Speaker Change: As it relates to the upmarket traction I think that was in the prepared remarks, maybe you could just share a little bit more about are you seeing any evolution on attach rate of other products beyond core and payroll and what are you getting in terms of some early signals on their propensity to buy these office of the CFO products, maybe versus more smaller mid market or smaller customers. Thank you.
Speaker Change: Yes, so I think the first part of the question.
Speaker Change: We are definitely seeing continued increases in attach rates I would describe them as gradual increases in attach rates as we bring on some of the customers in the upper end of our market and I would probably credit much of that to better execution on our part we called that out a year ago felt like there was a number of things that we could do training staffing different Roe.
Speaker Change: <unk> that support the sales organization I think we've executed well on all of those things and we saw the benefit of that through selling season. I think you saw that with the guidance raise I think thats, probably the bigger element we've seen.
Speaker Change: Product continued to perform well up market and continue to gradually increase attach rates I think the second part of your question.
Speaker Change: One of the things, we really liked about airbase.
Speaker Change: Was the customer overlap so the average sized customer that they had was very much similar to our average size customers. So more than 100 employees, but their average sized customer wasn't 10000 employees are in the enterprise space. So we think it's a nice product market fit and therefore, you see us having the strategy of taking that product getting feedback from customers using that voice of the customer to.
Speaker Change: Enhance capabilities and as we enhance the capabilities just like we have an HCM youll start to continue to expand that target market and it will appeal to may be slightly larger clients over time, and so I think youll see the best receptivity early on in the core part of our market, where we have the bulk of our customers and the bulk of our revenue so thats.
Speaker Change: That's certainly the strategy and it will certainly take us time to be able to execute upmarket, but we do think that that opportunity exists.
Speaker Change: That's helpful. Thank you.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Steve Enders with Citi. Your line is open.
Speaker Change: Okay, great. Thanks for taking the questions here.
Speaker Change: I guess, maybe just to start.
I think based on the commentary around seeing strong sales momentum and macro maybe.
Stabilizing to improving a bit I guess, maybe how has that potentially manifesting and kind of what you are seeing either in.
Speaker Change: Sales cycles are top of funnel or the number of.
Speaker Change: Number of that about that Youre, saying, just will be helping them a little bit more detail around some of those things.
Speaker Change: Hey, Steve It's Toby I mean, I guess I would say that I wouldn't call out any any significant movement in any of those things I would more characterize it is as we came into this fiscal year. After some some.
Speaker Change: After the overhang that we all saw across enterprise software and in our industry from a macro perspective throughout the first three quarters are our first three quarters of last fiscal year, we started to see that stabilize in Q4 and I think that's that's how we talk to you all about the setup coming into the fiscal year for Q1, and I think thats, what we saw materialize in Q1 as well as just a.
Speaker Change: Level of stability in the demand environment that we hadn't seen during the most of the prior year and I think that really continued into into Q2, and I think that put our our go to market and sales teams in a really good position to talk to prospects about our value prop.
Speaker Change: Earlier about the momentum that we saw in that and just really proud of their execution in the quarter.
Speaker Change: Okay, perfect that's great too great to hear.
Speaker Change: And then I guess just on maybe some of the <unk> dynamics appreciate calling out some of those earlier starts here hitting in <unk>, but anything else that we should kind of keep in mind for seasonality or maybe.
Speaker Change: Going through filing season, how should we be thinking about some of the impacts from from that perspective between the quarters.
Speaker Change: Yeah. Good question I think that has largely tracked consistent with expectations, maybe the one thing I'd call out relative to form filings is that typically grows.
Speaker Change: Touch less than recurring revenue grows more consistent with client growth or employee on the platform growth. So I think it's coming in consistent with expectations, obviously were able to raise the fiscal year pretty significantly, but thats, probably one when you look at the core recurring revenue versus form filings that would be a touch of a headwind into the third quarter and I think the other.
Speaker Change: The thing I'd mentioned would just be the contribution from air base doesn't have the same seasonal impact as our business. So from a growth standpoint within year over year, you would see air base year over year have a little bit of a less impact to growth in Q3 versus Q2 or Q4, because you don't have that same seasonal bump that the core <unk> business does outs.
Speaker Change: Out of that there's really nothing I'd call out as material.
Speaker Change: Okay perfect. Thanks for the questions.
Speaker Change: Thank you one moment our next question.
And that will come from the line of Jason <unk> with Keybanc. Your line is open.
Jason: Hey, Thanks for taking my questions just a couple quick ones.
Speaker Change: I don't want to get too ahead of my skis here, but on paper it looks like the <unk> recurring revenues accelerated but if we strip out airbase then we strip out a little bit of that pull forward with Q2 of really.
Speaker Change: Just been more similar to the 14% growth you saw in Q1 or did you see any little bit of acceleration there.
Speaker Change: No I think that's a fair characterization I think when you control for those two items I think it would be spot on or almost.
Speaker Change: Very close to what the Q1 recurring revenue growth would be.
Speaker Change: Okay.
Speaker Change: And then the pull forward of those clients from Q3 to Q2, you said it was start related.
Speaker Change: Or is it election related possibly I'm, just trying to understand why buy something with.
Speaker Change: But would be earlier.
Speaker Change: No not not election related at all I think when you think about the momentum we've talked about from.
Speaker Change: From the sales organization really in Q4 of last year in the first half of this fiscal year really really strong bookings momentum and those clients get slotted into a start period and to the extent, we're able to pull them earlier.
Speaker Change: It would really that type of scenario versus anything tied to the election and again <unk> got it characterize it as not particularly material on a $375 million quarter, we're talking about a handful of million dollars of impact, but it would really be those touch earlier starts versus anything election related.
Speaker Change: Okay perfect. Thanks.
Speaker Change: And one moment our next question.
Speaker Change: And that will come from the line of Alex Zukin with Wolfe Research. Your line is open.
Alex Zukin: Hey, guys. Thanks for taking my question a lot of I'll call. It might have been asked but maybe.
Speaker Change: Just on <unk>.
Speaker Change: Workforce levels I think some of your some of your peers called out impact from holidays and weather just curious kind of what youre seeing out there what you saw and what Youre seeing out there and how youre thinking about that for for the rest of the year and then I've got a quick follow up.
Speaker Change: Yeah. Alex This is Ryan nothing that we would call out relative to weather holidays that would have any material impact to that I think as I mentioned earlier, probably a touch better than expectations in the second quarter, we had a pretty prudent approach to work force levels. The balance of this fiscal year. So net net a positive wouldn't call it out as particularly meaningful.
Two results.
Speaker Change: Think guidance within the back half of the fiscal year continues to have a level of prudence around workforce levels.
Speaker Change: Perfect and then maybe just on the competitive side, we continue to hear about some some well capitalized.
Speaker Change: Call it private competitors.
Speaker Change: Specifically down market have you seen any kind of do you see those guys more often any change in win rates any any kind of RPC pressure or just anything to call out in general.
Speaker Change: Yes.
Speaker Change: So I don't think there is anything particular, we would call out I mean, I think the commentary that we would generally provide us. This has always been a really competitive space and continues to be today and I don't think we've seen any material shift in the mix of competitors.
Speaker Change: In any given deal, but certainly no doubt, it's competitive out there and I think going back to some of Steve's earlier comments I mean, our view has been that we want to be able to provide the most modern platform in the industry to our clients and prospects.
Speaker Change: With the broadest and deepest solution set and I think we're really well positioned to do that today and I think that remains the strategy.
Speaker Change: Perfect well gosh, it seems like it's working.
Speaker Change: Okay.
Speaker Change: And one moment our next question.
Speaker Change: That will come from the line of Jay <unk> with William Blair. Your line is open.
Speaker Change: Yes, thanks for taking the questions and congrats on the results just wanted to follow up on that go to market front. It sounds like Youre looking to add more reps in the back half of the year just given the strong selling season I know, it's early days with airbase, but as you move more into the office of the CFO does the profile of seller Youre looking.
Speaker Change: For change at all there.
Speaker Change: I think we'll evolve the go to market motion for the air based model. So don't want to give you the impression that we have that all figured out. However, we do have a lot of experience in terms of selling back to the customer base for a variety of products and so we're going to leverage that experience to be able to to do something similar so that ends up putting less of the burn.
Speaker Change: On that front and seller and allows us to have more specialized knowledge and more of an inside team type of model.
Speaker Change: So that is likely the motion that we certainly start with.
Speaker Change: And therefore that allows us to continue to hire HCM experience reps driving productivity over time, while being able to leverage some level of Apis.
Speaker Change: Office of the CFO experience to be able to help them when they are able to generate interest in the prospects more likely the model then changing our hiring profile.
Speaker Change: Okay. That's helpful and then great to hear the productivity gains with the new AI assistant I know, it's not being sold as a separate SKU today, but now that we're shifting more into kind of the <unk> season is that something youre looking to also add to your platform and could that potentially be an unlock.
Speaker Change: For monetization on the AI front sure.
Speaker Change: Yeah. So the interesting thing about our our clients business and what they use us for US there is a lot of workflows, there's a lot of approvals.
Speaker Change: A lot of things start with an employee they go to a manager they can be routed across the organization based off certain rules they get approved.
Speaker Change: So there are opportunities to be able to provide.
Speaker Change: AI use cases that are really automating these experiences and or really maybe shortening the experience by leveraging the historical data that we have to be able to provide insights skip some of the steps do some of the work on behalf of our customers I think we are in the early innings of that.
Speaker Change: And so yes, we definitely feel like that is an opportunity over time whether that.
Speaker Change: Gets translated into pure monetization.
Speaker Change: Better more modern software that allows us some pricing power or just differentiation, we think it's the right area of investment.
It sounds great. Congrats again on the solid results.
Speaker Change: Thank you one moment our next question.
Speaker Change: And that will come from the line of Arvind <unk> with Piper Sandler Your line is open.
Arvind: Hi, Thanks, Thanks for taking my question.
Speaker Change: You've certainly been talking about.
Speaker Change: Jane AI and some of the investments you've made in some of the benefits.
Speaker Change: Over the last few quarters.
Speaker Change: Question I have is.
It started to.
Speaker Change: Show up in terms of like improved win rates are in terms of kind of like a related charge folks more.
Speaker Change: Better margins.
Speaker Change: There's various sort of the G&A I basically showing up in terms of your financials and then the second thing is.
Speaker Change: But some of these.
Speaker Change: <unk> made from kind of deep deep seek.
Kind of last week does that change anything or does it matter to you at all.
Speaker Change: Yeah. So.
Speaker Change: I don't think it changes anything in terms of how bullish we are on being able to create unique experiences leveraging whether its machine learning algorithms, whether as generative AI models or other types of.
Speaker Change: <unk> use cases, I think those are all opportunities for us and.
Speaker Change: I think the easy answer is all of a sudden we have something that we're going to monetize and we can clearly talk about it but I don't think thats really the way, it's going to necessarily work that may happen over time, but I think the bigger opportunity is to leverage AI to continue to drive a better client experience to increase margins over time to be able to create more differentiation. So that we continue to grow recurring revenue.
Speaker Change: And ad units.
Speaker Change: Those are all so I think AI has to be embedded throughout the organization and be in all parts of the business driving productivity driving efficiency driving client experience and if we do that that really helps us really deliver the vision of being the most modern platform in the industry is by embedding AI across the organization and Thats the approach that we're taking versus.
Speaker Change: It may be being focused on some.
Speaker Change: Module that that we would try to singularly monetize.
Speaker Change: Okay.
Speaker Change: That's helpful. And then I also had a broad level question you had this kind of elevated growth rates obviously.
Speaker Change: In the last few years and then.
Speaker Change: Velocity, but also others in the industry, particularly kind of the cloud players have.
Speaker Change: Kind of kind of growth rates have taken kind of a step back.
Speaker Change: And I'm just trying to figure out is it is it because of some of the legacy players getting more competitive.
Or kind of saturation of market and and what I'm really trying to get to is do we do we ever get back to those kind of well above 20% growth rates.
Speaker Change: For you or for you.
Speaker Change: In the industry.
Speaker Change: Yes, I think you've got to look back over time, a little bit just theres been the ups and downs that have gone along with with Covid.
Speaker Change: Certainly no doubt.
Speaker Change: Cloud players that you referenced or how much bigger today than they would have been pre COVID-19 at the same time I think from a strategy perspective, our consistent strategy has been to Ben Ben the deliver of the most modern platform in the industry. We think we're doing that today, it's what's helping us win that's what's helping us be the highest growth player out there.
Speaker Change: I think that'll continue to be the focus as we look forward and I think everything that we're doing today, whether it's with respect to air base or the development of the new modules that we've released and talked about in or whether it's some of the AI investments that we've made that Steve just walk through I think those are all the elements that go into being able to provide the most modern platform out there.
Speaker Change: And ultimately beat the competition and the only thing I would add Tobey is at the same time, we've really been focused on delivering value from a shareholder perspective in terms of improved EBITDA and free cash flow as Ryan mentioned and so it's really it's really about growth is our number one priority, but very close second behind that is making sure that we're delivering both topline and bottom line improvements and we feel.
Speaker Change: Very comfortable being able to execute that strategy on an ongoing basis.
Speaker Change: Perfect.
Speaker Change: Congrats on a good print and looking forward to more of these as the year progresses.
Speaker Change: Thank you I'm showing no further questions in the queue. At this time I would now like to turn the call back over to management for any closing remarks.
Speaker Change: Thank you very much I just like to say, thank you to everyone for your interest in philosophy. Thanks for joining the call and a special thank you to all of our employees for making a great quarter and taking great care of our clients. Thanks, everybody and have a good night.
Speaker Change: Thank you all for participating. This concludes today's program you may now disconnect.
Speaker Change: Okay.
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