Paylocity - Q4 2023

Transcript

Operator (participant)

Hello, and thank you for standing by. Welcome to Paylocity Holding Corporation Fourth Quarter 2023 Fiscal Year Results Conference Call. At this time, all participants are in only mode. After the speaker's presentation, we will question and answer session. To ask the question during this session, you press star one one on your telephone. There are automatic advising your hand is raised. To withdraw your question, please press star one again. I would now like to turn the conference over to Ryan. Sir, you may begin.

Ryan Glenn (CFO)

Good afternoon, welcome to Paylocity's earnings results call for the fourth quarter and fiscal year 2023, which ended on June 30th, 2023. I'm Ryan Glenn, Chief Financial Officer, joining me on the call today are Steve Beauchamp and Toby Williams, Co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks, including statements made during the question and answer session, contain forward-looking statements. These statements are subject to numerous important factors, risks, and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements.

These statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained therein and other disclosures. We do not undertake any duty to update any forward-looking statements. During the course of today's call, we will refer to certain non-GAAP financial measures. We believe that non-GAAP measures are more representative of how we internally measure the business, and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website at paylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission.

Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to 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, Toby will be attending the Stifel Technology Executive Summit in Deer Valley on August 29th and the Citi Global Technology Conference in New York on September 7th, and I will be attending the HR Tech Conference in Las Vegas in mid-October. Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve.

Steve Beauchamp (Co-CEO)

Thank you, Ryan, and thanks to all of you for joining us on our fourth quarter and fiscal 2023 earnings call. Our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace and help drive total revenue growth of 34.7% in Q4. For fiscal 2023, we reached a key financial milestone for the company, with total revenue crossing the $1 billion threshold and finishing at just under $1.2 billion or 37.8% growth over fiscal 2022. Our solid results were once again driven by both adding new clients and employees and increasing average revenue per client.

We ended fiscal 2023 with 36,200 clients, compared to 33,300 at the end of last fiscal year, an increase of 9%, while total employees on the platform grew by mid-teens, consistent with the historical growth trends and in part driven by the success we're seeing upmarket as larger clients realize the benefits of our sustained investment in product development and the most modern platform in the industry. Revenue retention also remains strong at greater than 92%. Average recurring revenue per client was over $30,000 in fiscal 2023, compared to just over $25,000 in fiscal 2022, an increase of 19% as a result of increased employees on the platform, rising product attach rates across our client base, and success with larger clients.

We continue to attach more product at the time of sale and have realized increased success selling back into existing clients as our products focused on the most modern workforce resonate across our entire client base. Our sustained investment in product development allows us to continue to expand our product suite, evidenced by the recent announcement of several new premium offerings and feature enhancements, including Advanced Scheduling, Learning Management, and Market Pay. Advanced Scheduling builds upon our existing scheduling capabilities by adding advanced features, such as the ability to match scheduling needs with employees based on job function or role, skill set, and certifications, as well as swap, claim, manage shifts directly via our mobile device.

Similarly, new enhancements to our Learning Management module allows users to easily create and share new trainings via Community, including a new safety training bundle of 20 courses to help clients ensure on-the-job safety and compliance. Lastly, the most recent addition to our suite of modern workforce solutions, Market Pay, allows our clients to easily explore, track, manage, and compare market pay data across different job families and positions to help make better compensation decisions, evaluate specific roles accurately, and comply with pay and equity job posting requirements in multiple states. Collectively, these three new product offerings, along with continued investment across our product suite, has increased our PEPY to $500, achieving the target we set four years ago.

As a result, we are now raising our PEPY target to $600 and are confident in our ability to achieve this goal in the coming years as we continue to develop and deliver market-leading new products. Our commitment to product development continues to be recognized in the market, with Paylocity recently being named an overall leader in 10 HCM product categories in G2's Summer 2023 Grid Reports. Paylocity was recognized as TrustRadius' top-rated HR management software platform for 2023, won the 2023 Best Human Capital Technology Solution in the SIIA Business Technology CODiE Awards, and achieved the leader ranking in NelsonHall's 2023 NextGen HCM Technology NEAT Report for both the SMB and mid and large market segments.

... Our strong culture, industry-leading software, and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal 2023, I'd like to thank all of our employees for a fantastic year. I would now like to pass the call to Toby to provide further color on the quarter and fiscal 2023.

Toby Williams (President and Co-CEO)

Thanks, Steve. As Steve highlighted, we continue to build upon our differentiated value proposition of providing the most modern software in the industry, with the introduction of new premium products and feature enhancements. While still early, the value proposition of these new capabilities is clearly resonating in the market, as evidenced by one of our professional services clients, with over 300 employees, already leveraging Market Pay to analyze compensation for comparable positions, to ensure its pay remains competitive, and to help attract and retain high-quality talent in an increasingly tight labor market. In Q4 and fiscal 2023, this dynamic was reflected in solid sales execution across our entire target market. We plan to continue investing in go-to-market initiatives to carry this momentum forward into fiscal 2024.

We've expanded our sales force for fiscal 2024 by 18%, from 694 sales reps in fiscal 2023 to 820 reps in fiscal 2024. I'm pleased that we're fully staffed heading into the new fiscal year. We also continue to invest in our channel initiatives. We remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in Q4 and full fiscal 2023. In addition to an 18% increase in sales reps for fiscal 2024, we remain committed to continuing our investments in digital marketing and digital lead generation to support our go-to-market motion.

As a result of our strong financial performance, including our adjusted EBITDA margin of 31.9% and free cash flow margin of 18.4% in fiscal 2023, which puts us well into the range of our current financial targets, we are increasing certain of our targets beginning in fiscal 2024. This is a reflection of our strong financial performance in fiscal 2023, and I'm very pleased with our ability to continue to grow while demonstrating the scalability and leverage in our business model. While Ryan will provide additional detail, we're pleased to continue to target 20%+ total revenue growth with an increased adjusted EBITDA margin target of 35%-40% of revenue, and an increased free cash flow margin target of 20%-25% of revenue.

The strong culture at Paylocity continued to be recognized externally this fiscal year, as we were named to Built In's Best Places to Work and among the best and brightest companies to work for in the nation. Additionally, for the second year in a row, we also earned a placement on the Forbes list for Best Companies for Diversity and Best Employers for Women. Echoing Steve's comments, I would like to thank all of our more than 6,000 employees for a fantastic fiscal 2023, which would not have been possible without their dedication and commitment to our clients. I would now like to pass the call over to Ryan to review the financial results in detail and provide fiscal 2024 guidance.

Ryan Glenn (CFO)

Thanks, Toby. Total revenue for the fourth quarter was $308.5 million, an increase of 34.7%, with recurring and other revenue up 24.3% from the same period last year. As Toby noted, our sales team had another solid quarter, we were pleased to come in $5.3 million above the top end of our guidance range. Adjusted EBITDA for the fourth quarter was $100.6 million, or 32.6% margin, exceeded the top end of our guidance by $4.1 million. For fiscal 2023, adjusted EBITDA was $375.2 million, or 31.9% margin, resulting in leverage of 400 basis points versus fiscal 2022.

Additionally, we made significant progress on free cash flow, with fiscal 2023 margin of 18.4%, up nearly 650 basis points and an increase of 111% on a dollar basis from fiscal 2022. We remain confident in our ability to continue expanding free cash flow margin in fiscal 2024 and beyond. We continue to make significant investments in research and development. To understand our overall investment in R&D, it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 15.2% of revenue in the fourth quarter. On a full year basis, total R&D investments were 14.5% of revenue. On a dollar basis, our year-over-year investment in total R&D increased by 45.7% in fiscal 2023 when compared to fiscal 2022.

We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth. On a non-GAAP basis, sales and marketing expenses were 22% of revenue in the fourth quarter and fiscal 2023. On a non-GAAP basis, G&A costs were 10.7% of revenue in the fourth quarter versus 13.2% in the same period last year. Full year G&A costs were 11% of revenue, as compared to 12.9% in fiscal 2022. We remain focused on consistently leveraging our G&A expenses on an annual basis. Briefly covering our GAAP results, for Q4, gross profit was $211.7 million, operating income was $49.4 million, and net income was $37.3 million.

For the full year, gross profit was $807.6 million, operating income was $155 million, net income was $140.8 million. In regard to client-held fund and interest income, our average daily balance of client funds was $2.5 billion in Q4 and $2.4 billion for fiscal 2023. We are estimating the average daily balance will be approximately $2.3 billion-$2.4 billion in Q1 of fiscal 2024, with an average annual yield of approximately 410 basis points. On a full year basis, we are estimating the average daily balance will be $2.5 billion-$2.6 billion in fiscal 2024, with an average yield of approximately 420 basis points.

Our guidance includes last week's 25-basis-point increase, but does not currently include any other changes to interest rates in fiscal 2024. Before I provide our financial guidance, as Toby mentioned, we're updating certain of our key financial targets. Since setting our current targets in August of 2018, our adjusted EBITDA has increased from 21.5% of revenue to 31.9% of revenue, an improvement of over 1,000 basis points. Our free cash flow margin has increased from 12.9% of revenue to 18.4% of revenue, a 550-basis-point improvement. As a result of our strong financial performance and the scalability of our business model, we are revising certain key financial targets, which we expect to make progress against beginning in fiscal 2024.

In regards to total revenue, our goal of 20%+ growth remains our target. We continue to be confident in our ability to achieve this goal. Our adjusted total gross margin target is increased to 75%-80% from 70%-75%. Our general and administrative spend target is reduced from 10%-15% of revenue to 5%-10% of revenue. Our adjusted EBITDA target is increased to 35%-40% from 30%-35%. Our free cash flow margin target is increased to 20%-25% from 15%-20%. Please refer to our earnings press release for additional details. Finally, I'd like to provide our financial guidance for Q1 and full fiscal 2024.

For the first quarter of fiscal 2024, total revenue is expected to be in the range of $314.1 million-$318.1 million, or approximately 25% growth over first quarter fiscal 2023 total revenue. Adjusted EBITDA is expected to be in the range of $89.5 million-$92.5 million, which represents approximately 250 basis points of leverage over Q1 of fiscal 2023. For fiscal year 2024, total revenue is expected to be in the range of $1.405 billion-$1.410 billion, or approximately 20% growth over fiscal 2023.

Adjusted EBITDA is expected to be in the range of $464 million-$468 million, which represents approximately 120 basis points of leverage over fiscal 2023. As it relates to the broader macro environment, workforce levels continue to be roughly flat in all material respects. This is contrary to what we have historically experienced in a normalized business environment, with recurring revenue typically benefiting from two-three points of growth, driven by broader GDP expansion and workforce levels. Our guidance assumes this trend of flat workforce levels continues in Q1 and fiscal 2024, and thereby representing an equivalent of 2-3 point headwind to recurring revenue growth.

After crossing the $1 billion threshold in fiscal 2023, and with continued investments in our go-to-market motion and product roadmap, we enter fiscal 2024 with a high level of confidence in our ability to continue to drive strong revenue growth, while simultaneously scaling our business and driving continued adjusted EBITDA and free cash flow leverage. Operator, we are now ready for questions.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 1 1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 1 1 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Brad Reback with Stifel. Your line is open.

Brad Reback (Managing Director)

Great. Thanks very much. Steve, if we think about the 18% increase in sales force headcount entering the year, as well as the success you're having driving higher ARPU into the base, any reason we shouldn't think of 18 as the absolute bottom, and, and in fact, not being able to do a little better than that on the subscription side? Thanks.

Steve Beauchamp (Co-CEO)

Well, I think, you know, if you look at our guidance, it hasn't changed from a philosophy perspective. We're at the front end of the year, and there's a lot of execution in front of us. Being able to guide to total revenue of 20% revenue growth, we feel really good about. We've got all the heads on board and up and running, which is always a goal for us at the start of the year. We've got a product suite that we have enhanced pretty significantly, and so we feel pretty good about the momentum. Certainly, you know, our guidance wouldn't contemplate us being below the 18% on a recurring basis. I think that's a reasonable way to think about it.

We feel confident in our ability to hit the goals, and I think we have a history of being able to do even better than our initial guidance.

Brad Reback (Managing Director)

Perfect. Thanks very much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Raimo Lenschow with Barclays. Your line is open.

Sheldon McMeans (Assistant VP of Equity Research)

Hey, great. Thanks for taking our question. This is Sheldon on for Raimo. As your product portfolio grows with adding the new capabilities and talking about the $600 per employee per year target, how are you thinking about revisiting your install base and kind of the install base opportunity, particularly as we enter a more normalized growth environment? Is there any opportunity to lean more into upsell motion in 2024? Thank you.

Ryan Glenn (CFO)

Sure. You know, we really started selling back to the client base back in 2018, so we've been doing that for a number of years. We've been increasing that inside sales team at a much faster rate than the rest of our sales force, really, since we started back in 2018. That team did really well this past fiscal year. We were really happy with their success. We are certainly increasing that team beyond the average 18% headcount, and so it will have a more material impact going in the next fiscal year. It, it still represents a small portion of our overall revenue growth.

We are still focused on primarily landing new customers, and then continuing to enhance our product portfolio, therefore giving more products for our inside sales team to sell back to the client base. Yeah, it's the right way to think about it. That will gradually continue to get bigger, and it is growing faster than our outside sales team.

Sheldon McMeans (Assistant VP of Equity Research)

Great. A quick follow-up, if I may. It's nice to see the I would say faster than peer generative AI roadmap. I was just wondering, you know, how are you feeling about AI, ML talent, engineering talent at your organization? And just more broadly, thinking about.

Ryan Glenn (CFO)

Yeah

Sheldon McMeans (Assistant VP of Equity Research)

R&D headcount investment?

Steve Beauchamp (Co-CEO)

Yeah. So I think I'll take the second part first. From an R&D headcount investment, we've been pretty consistent when you look at what we expense and capitalize, being around that 15% of R&D. This is definitely a competitive space. It's a pretty dynamic workforce environment, where we have lots of product ideas that we get from our customers and that we feel we can add to the product suite. We've maintained a pretty steady level of R&D investment when you look at it as a percentage of revenue, and I think that philosophy is what we have going forward. There's lots of things that we think we can do to enhance our portfolio. On the first part of your question, we really started a data practice team about four years ago.

If you go back, we've had predictive capabilities in our platform around who might leave a customer. We've got our MWI based off algorithms, and so we've had a team that's been investing in that space for a while. I think that's what allowed us to get to market relatively quickly with the generative AI capabilities, both in Community and now in job descriptions. We've got a long list of places where we think we can continue to add those capabilities for our customers.

Sheldon McMeans (Assistant VP of Equity Research)

Great. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Bryan Bergin with TD Cowen. Your line is open.

Bryan Bergin (Managing Director of Equity Research)

Hi, guys. Good afternoon. Thank you. wanted to kick off with kind of a fiscal 24 growth cadence question. As we think about what you've guided to here in the first Q guide relative to the fiscal 24 growth guide, particularly on recurring, can you give us a sense for whereabouts you anticipate the recurring growth cadence to kind of drop out at?

Toby Williams (President and Co-CEO)

I mean, maybe, maybe I'll start, Bryan, to jump in too. I mean, I, I think when you look at the first half of the year, obviously that's where the hardest comps are relative to last year. I think overall, we feel very good about the guide that we provided, going back to Steve's comments a few minutes ago, just getting, you know, guiding to that 20% mark for the fiscal year. I think obviously, like I said, I think the first half is the toughest from a comps perspective, but I think we feel pretty good about the momentum that we have across the business from a recurring perspective.

Certainly excited about a lot of the product announcements that we've made and, you know, feel pretty good about the adoption that we've seen across the portfolio in the products that we had announced. I think, you know, while it may take, it's early days for the things that we've just announced, you probably start to see more actual impact from that when you get to the back part of the fiscal year. I think from a momentum perspective, feel pretty good about what we're seeing from a, from a sales perspective, feel pretty good about the momentum we have in new product release and adoption, and, you know, I think overall, feel very good about being able to guide to, to, to, to 20% for the fiscal.

Bryan Bergin (Managing Director of Equity Research)

Okay. Okay, makes sense. Follow up on the long-term target, so it's nice to see the, the grace around EBITDA and the free cash flow margin. Within gross margin and, and G&A specifically, can you talk about some of the bigger sources of expansion? Just obviously, I'm understanding natural leverage on broader scale, but are there other key levers you have here to discuss that, that gives you that confidence?

Steve Beauchamp (Co-CEO)

Yeah. Sure. I think gross margin, we've consistently expanded, since IPO in 2014. I think the reason for us being able to do that is you hit one of them, scale, but I think the second one is a lot of the new products that we've added, don't always require the same lift, either from an implementation or ongoing service perspective. You think about the three additions that we had now, those are all incremental from a gross margin perspective. As we see our revenue mix shift, some of the newer products we've added, we get natural lift in, in gross margin, and that's probably the, the biggest driver.

Bryan Bergin (Managing Director of Equity Research)

Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Terry Tillman (Managing Director)

Yeah, thanks for taking my question and follow-up. I guess, maybe the first question, just really, I think in the prepared remarks when you all were quoting some of the stats, mid-teen employee growth, and I think you talked about larger customers. Was there anything notable in 4Q about the mix of bookings coming from larger customers, and then kind of any quantification on, is the size of the larger customer increasing? The second part of this question is, based on the 18% sales capacity growth, do you foresee maybe a mix shift from where the business is coming from large, midsize or smaller customers in FY 2024?

Steve Beauchamp (Co-CEO)

Sure. I think the last part of your question is we, we did have a mix shift if you go back several years ago. First, we kind of expanded below our original target market, then we expanded up in our target market. We started to see success upmarket in particular, at an accelerated rate. We put more resources against that. I think that was the case over the last couple of years. That is probably steady now. We really feel good about the mix that we have in each segment. We think about the growth rate of the 18% headcount growth being fairly similar across each of the segments.

Terry Tillman (Managing Director)

Okay, great. Just the follow-up is on, I think there was a comment about workforce level being flat for 1Q. Did you say anything about, like, the assumption or what you're thinking about for the full year on workforce levels? Same thing or any different dynamic? Thank you.

Ryan Glenn (CFO)

Yeah, Terry Tillman, this is Ryan Glenn. I think the same approach, and I think we've been consistent with this methodology going back really to the beginning of the pandemic. We guided to what we can see, and as we said in the prepared remarks, workforce levels have effectively been flat, really going back 12-13 months at this point. We assumed flat levels, certainly for Q1, but for the balance of 2024, and we'll certainly watch those and update you all as we get deeper into the fiscal.

Terry Tillman (Managing Director)

Okay, great. Thanks.

Operator (participant)

Thank you. Please stand by for our next question. Our next question is from the line of Brian Peterson with Raymond James. Your line is open.

Brian Peterson (Managing Director)

Hi, gentlemen. Thanks for taking the question. Steve, I wanted to hit on AI, but maybe through a different lens. I think one of the things that, that people are talking about is the ability to, to really accelerate product and software development cycles. I'd be curious to hear how you guys are thinking about using it internally, and do you think that can have a meaningful difference in terms of either the margins or how quickly you can develop new products?

Steve Beauchamp (Co-CEO)

Sure. Yeah, I think just stepping back, I think AI will impact every part of the business, whether that's how we service customers and onboard customers, whether that's how we're building software products and using generative code building tools, whether it's capabilities that we can actually deliver to the customer that drives efficiency for them. We're looking at all aspects of it. We've certainly been actively using that behind the scenes. I think we've found a lot of success generating test use cases from a code perspective. That's probably where we get kind of are on that journey. We, we are, are pretty passionate that this is a really interesting opportunity across all aspects of our business.

Brian Peterson (Managing Director)

Great. Maybe just a quick follow-up. I know you mentioned the 18% growth in the sales headcount. Any comments on how the tenure of that group looks, and thoughts on expectations for fiscal year 2024? Thanks, guys.

Toby Williams (President and Co-CEO)

Yeah. Hey, Brian, Toby. Yeah, I mean, I think overall, we, we came into the year fully staffed, which we're, which we're really happy about. That's been the case over the last, you know, few years at least, and came into this year growing the sales force at 18%, consistent with what we did last year. I think overall feel, you know, really good about the mix of talent that we have in that. You know, certainly a, a, a skew as we would have historically done towards folks coming in with industry experience, which has always been productive for us. I think we're overall really happy with how we're staffed as we come into fiscal 2024.

Brian Peterson (Managing Director)

Thanks, guys.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Patrick Walravens with JMP Securities. Your line is open.

Owen Hobbs (Equity Research Associate)

Hi, this is Owen Hobbs on for Patrick. Thanks for taking the question. I'm, I'm curious about the, like, the a customer's timeline to kind of ramping up with product adoption. If they'd like, say, start out with, -

Steve Beauchamp (Co-CEO)

Sure.

Owen Hobbs (Equity Research Associate)

With the payroll product, how, how, how long would it take them to kind of adopt, adopt other products in the suite?

Steve Beauchamp (Co-CEO)

Yeah, I think you can look at it through 2 different ways. One is, if you, you know, we, we talk about the number of employees that we've got kind of on the platform, the average size customer that we have. We give you the employee count. You can really calculate that realized PEPY, which has kind of typically been 50%-60% of our maximum PEPY. That gives you a sense, 'cause we bundle and package, that gives you a sense of what they're buying in terms of the total available opportunity. There's still lots of opportunity to drive that higher. That's probably the easiest way to look at it. I think conceptually, as we build new modules, we definitely feel like that we can get that module into the 10%-20% range over time.

That gives us the ROI and the conviction to be able to kind of build something for customers. Some of our modules are 50% plus product penetration rate. We've got some still below that 20%, but we've got to have conviction that we can get into that range before we actually build and launch a product.

Owen Hobbs (Equity Research Associate)

Awesome. Thank you. I know this isn't, like, the main focus right now, but thinking kind of longer term, the expansion opportunity within a business, kind of how, how, how much of that is driven by the increase in a customer's employee count versus increasing PEPY via new products?

Steve Beauchamp (Co-CEO)

Yeah. Historically, in a growth GDP environment, If, say, say GDP was growing 2% or 3%, we would typically get 2% or 3% in our client base of additional employees, which translates to roughly that same revenue growth number, because people pay us on a per employee basis. That was pretty typical. As Ryan mentioned, for over a year now, the number of employees on the platform has been flat. Our clients aren't, aren't losing employees, but they're also not adding employees, so there's no necessary tailwind from that. Really, at this point, when you look at the results we're delivering, there's no help from extra employees on the platform. That all just comes from us selling new customers, clearly.

It's really being driven from selling more to every new customer that's kind of coming on board, and then having that inside sales team I spoke about earlier, actually selling back to the client base, that second part being a smaller portion than the first.

Owen Hobbs (Equity Research Associate)

Awesome. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Scott Berg with Needham & Company. Your line is open.

Michael Rackers (Equity Research Associate)

Hi, guys. Congrats on the quarter, and thanks for taking my questions here. This is Michael Rakers on for Scott today. I was just curious, kind of on your thoughts and maybe, you know, some commentary around the opportunity with the global payroll space. I mean, do you see international kind of as a next stage of growth over the long term? Just what are your kind of thoughts on the general trends there? Thanks.

Steve Beauchamp (Co-CEO)

Sure. I think we're definitely squarely focused on the opportunity in the U.S. We still have relatively low penetration in terms of the target market that we're going after. We see a huge TAM that we've got to focus on, and we, we've definitely got a product set that we think creates differentiation. Where we do see a need to be able to have some global capabilities is when you've got a U.S. headquartered customer who may have some number of employees abroad. That's why we obviously had purchased Blue Marble and integrated that into our suite, so we can handle that need for customers. They can be a Paylocity customer, and they can pay their 10, 20, 30, 50 employees abroad through Blue Marble and the network of partners that we leverage.

So that has been our strategy globally. You know, we'll always, you know, look for interesting opportunities, but our primary focus will be U.S.-headquartered companies, and with the size of the TAM that we've got in front of us, we think there's plenty of opportunity there.

Michael Rackers (Equity Research Associate)

Awesome. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samana with Jefferies. Your line is open.

Samad Samana (Managing Director)

Hey, good evening. Thanks for taking my questions. Maybe first one, just as I think about the, the bookings cadence or linearity in the quarter, can you maybe just help us understand how from April to May to June trends went, and how does that compare to normal booking seasonality in a fiscal fourth quarter?

Steve Beauchamp (Co-CEO)

Hey, Samad. I mean, I don't think we saw anything different from a linearity perspective in terms of the bookings coming in. I mean, I think, you know, obviously when you look at, as I said a few minutes ago, when you look at last fiscal year, you had heavy compares coming in in the first half. I think as we got to, you know, back half of this last fiscal year, I don't think we saw anything different in terms of, you know, seasonality or difference in performance quarter to quarter, or then year-over-year from a sales perspective.

I think the only thing, you know, probably note is, is just going back to comments that we've made over the last, you know, probably handful of quarters, and that Steve made a few minutes ago, just in terms of probably seeing incrementally better performance upmarket. I think that just reflects, you know, probably the strength of the solution and what we've done from a product perspective, just being, you know, more competitive there, over time.

Samad Samana (Managing Director)

Great. I'm gonna ask a sales-related question. I've never worked in sales, so please indulge me if this is a bad one. I'm curious, when you think about just the unit count growth of sales reps, does the number of heads matter as much if you're targeting larger deals? Do more reps work on a larger deal, or is it still the same number assigned? Just how should we think about-

Steve Beauchamp (Co-CEO)

Sure

Samad Samana (Managing Director)

... targeting larger customers and, and sales rep count?

Steve Beauchamp (Co-CEO)

Yeah. So, we have consistently quoted sales reps based off, you know, annual recurring revenue and new annual recurring revenue. Now, sales reps' natural behavior is they will go for the larger customers because there's more employees there, and that gives them more new revenue. But the reality is, you know, we also get a significant business through broker referrals, so that's over 25% of our business. You've kind of got to follow those leads wherever you, wherever you can find them. You get client referrals, so you kind of follow wherever you go. You can't purely just target the larger customer. You've really got to go after what's available to you.

Frankly, some of our best reps, they've got, you know, great productivity when you look at the unit volume as well as the amount of product that they sell. The last thing I would say, we also talked about the fact that some of our most experienced reps, we've specialized in having them focus upmarket. That's another way that we don't get everybody chasing the bigger deals, but we focus some of the best and most experienced people to go after those larger customers, and that's been a good formula for success for us.

Samad Samana (Managing Director)

Great. Appreciate you taking my question. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Marcon with Robert W. Baird. Your line is open.

Mark Marcon (Senior Research Analyst)

Hey, good afternoon, thanks for taking my questions. Got 2 questions. The 1st one is, basically, can you talk a little bit about the pipeline you're currently seeing? How does that compare to a year ago? How active is it? Any reason to think that, you know, sales force productivity and conversions wouldn't be as good as, as they have historically been?

Steve Beauchamp (Co-CEO)

Yeah, that's a good question, Mark. I would say there's no real big call-out when we look at the pipeline. You know, the pipeline's growing nicely as we add reps, and they continue to put more opportunities in top of funnel. It's, you know, it's a little challenging from a history perspective. You know, you think of COVID and all the environment that you came. You came out of COVID. You had a little bit of a bounce out of COVID in terms of people not having done things for a while. We're now kind of getting back into a more normalized environment. I think as we continue to see the pipeline build and we look at that, you know, almost from a pre-COVID level, we feel really good about the activity levels that we're seeing and how we're ramping new reps.

Mark Marcon (Senior Research Analyst)

Great. Really appreciate the updated, you know, financial targets. You're, you're targeting roughly 120 basis points of margin improvement for this year. How should we think about the cadence of the margin improvement, you know, towards going towards the top end of the target range when we strip out the impact of float, you know, in terms of the interest income?

Steve Beauchamp (Co-CEO)

Hey, Mark, it's Ryan. I think, you know, if you step back and probably think about the journey we've been on since we set those initial targets five years ago, in August of 2018, I referenced a few data points in the prepared remarks on adjusted EBITDA and free cash flow leverage that you've seen over that period of time. As you said, we sit here, you know, well into the previous targets and I think continue to have a lot of confidence in our ability to drive leverage, particularly in gross margin and G&A, at the same time, as we have historically invest in sales, marketing, and R&D.

I think, you know, when you pull that forward to the initial 2024 guide, you know, on the backs of significant leverage we saw across adjusted EBITDA and free cash flow in 2023, setting out that initial guide, as you said, of north of 100 basis points of adjusted EBITDA leverage. I think, you know, that is certainly something that is reasonably close to what our target would be annually. I think we've had years where we started closer to 50 basis points of leverage and through overperformance, have been able to take the guide up. I think we feel good being able to start the year at that 20% revenue growth number, at the same time, continue to make progress there on adjusted EBITDA.

Mark Marcon (Senior Research Analyst)

Great. Thank you.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Alex Zukin with Wolfe Research. Your line is open.

Alex Zukin (Managing Director)

Hey, guys. Thanks for taking the question. I guess maybe wanted to ask one about the configuration of the guidance for next year. Is it safe to say that, you know, we're still-- we're assuming kind of a single digit, high single digit net client, net adds for the year, where the bulk of the growth is gonna come from, you know, larger, both larger lands and more expands? Then maybe just if you can double-click on how much you expect growth for the year to come from the install base selling compared to where maybe fiscal, where you ended fiscal 2023. Then any comments on just the competitive environment, who you're taking share from increasingly, et cetera?

Steve Beauchamp (Co-CEO)

Okay, so maybe start in reverse order. I, I wouldn't call it anything different from a competitive environment. It's always been very competitive. It's kind of the usual suspects. And really, our points of differentiation come down to the solutions and really providing a very modern experience. No change there. In fact, we feel good about our roadmap to be able to continue to compete from that perspective. I think in terms of, you know, some of the other points, Ryan or Toby, you want to handle one or the other pieces?

Toby Williams (President and Co-CEO)

Yeah, I don't think I mean, I, I think to start, I mean, I, I think in terms of your question, in terms of what the mix is from a growth standpoint and across sort of the target market, I mean, I think while it's been different every single year, you know, I think we, we, with what we're seeing right now, I don't think we have any different expectations for fiscal 2024 in terms of the mix of business relative to what we've seen kind of over the course of fiscal 2023. I think to Steve's point, that the competitive environment tends, it has-- it's always been competitive, and I don't think we see any major shifts there. I think our, our plan for, for 2024, you know, contemplates largely what we've been seeing over the course of the last few quarters.

Alex Zukin (Managing Director)

Perfect. Thank you, guys.

Operator (participant)

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

Dan Jester (Director of Software Research)

Great, thanks for taking my question. I wanted to ask about the $500 PEPY. It seems like a really big step up compared to last year, and so I'm just wondering, you know, what's lets you this year introduce so much new product? Is it you're just seeing better productivity out of R&D organization? That the types of products that you're launching are just maybe easier to get into the marketplace? Maybe just help me think about that big step up, because it seems it's the biggest in, in several years.

Steve Beauchamp (Co-CEO)

Yeah, it's a good question. You know, I think we've been, you know, pretty happy with our velocity in R&D overall. Sometimes these things do happen where you're doing a lot of work on the back end. Some products can take you, you know, nine or 12 months to build. You may have other products that are multiyear efforts that you're kind of working on. You know, the timing of, of launch can be very different. I think what you're seeing is the product of a couple years of pretty strong work. The other thing I would say is we've also focused on some, some platform capabilities, you know, that would allow us to go faster across R&D.

I feel like the investments we've made over the last couple of years, you're starting to see now in terms of the new product launches. I think it actually, more importantly, positions us to be able to have high velocity on a go-forward basis, and, and that's pretty exciting for us.

Dan Jester (Director of Software Research)

Great. Thank you. Then appreciate the new financial targets. Maybe any updates on how you're thinking about capital allocation, inorganic growth, going into the new year? Thank you.

Toby Williams (President and Co-CEO)

Yeah, I don't think there's any different contemplated from a capital allocation perspective. you know, I think our view has consistently been that we, you know, want to use capital to be able to drive growth. obviously, you're seeing the strength right now, as Steve was just talking through, and our ability to organically develop and deliver, product to continue to drive differentiation in the market. I think, you know, I don't think there's any substantive change in our view on capital allocation as we think about fiscal 2024.

Dan Jester (Director of Software Research)

Great. Thank you very much.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Jason Celino with KeyBanc Capital Markets. Your line is open.

Jason Celino (Director and Senior Research Analyst)

Great, thanks. Just some, just two quick ones. When we think about OpEx and R&D growth for the upcoming year, is the deceleration we're seeing just kind of like a return back to a more normalized spending after the two, few previous years of some pretty heavy investment?

Ryan Glenn (CFO)

Yeah, I mean, I think that's right. If you look at the, the spend levels that we had in fiscal 2023, I think total R&D was up, about 46%, both in Q4 and in, in the full fiscal year. I think what, what you'll see as we head into a more normalized environment in fiscal 2024, you'll see R&D spend and, and sales and marketing as well, kind of back to that historical cadence that, that tracks much closer to revenue growth.

Jason Celino (Director and Senior Research Analyst)

Great. Ryan, when we think about the, the two-three points of headwind from the staffing levels, like we being flat for the upcoming year, will that be pretty consistent each quarter? I imagine it would, but just want to check.

Ryan Glenn (CFO)

Yeah, nothing I'd call out from a seasonality standpoint. I, I think it's pretty consistent in each quarter. There's, there's, there's nothing of note from that perspective.

Jason Celino (Director and Senior Research Analyst)

Great. Thank you.

Toby Williams (President and Co-CEO)

Yep.

Operator (participant)

Thank you. Please stand by for our next question.... Our next question comes from the line of Andrew Nowinski with the D.A. Davidson & Co.. Your line is open.

Robert Simmons (Research Analyst)

Oh, sorry, I think this is actually me. This is Robert Simmons for myself. Thanks for taking this question. You touched on the general topic, but more specifically, can you talk about how Blue Marble is performing, in terms of helping you win new clients and for cross-sell?

Steve Beauchamp (Co-CEO)

Sure. Yeah, we've called out the success that we've had upmarket, and that is where you run into more international opportunities. Customers might have employees in multiple countries. Definitely, Blue Marble's been a component of our product suite that has created some nice differentiation upmarket. If you're a customer, and you've got 1,500 employees, and you have 50 employees in, you know, three different countries, we've got a great solution for you. We can handle everything that you need, and that does become a differentiation point in terms of us selling those customers. I think it's been a nice contributor upmarket. It continues to grow as well, when you look at the risk standalone revenue that we bring in from those opportunities.

The biggest thing is really focused on, the differentiation upmarket.

Robert Simmons (Research Analyst)

Got it. That makes sense. Then, great to see the, the, the revised long-term targets. Do you have a timeframe for when you think you can, you can achieve those and get into those ranges? Then also, how long do you think you can maintain 20%+ growth?

Ryan Glenn (CFO)

Yeah, I'm going to hit the second part and, and let Steve hit the, the last part of your question. I think, you know, when you set the, the previous targets in August of 2018, I think, you know, we're five years later, and we were well under those ranges. I think that's probably the, the, the right way to think about it. We don't have a specific year that we'd expect to hit those, but I think at the same time, our expectation would be, we'd continue to make progress beginning in 2024 and on an annual basis towards those revised targets. Continue to have a high degree of confidence in being able to grow the business at a healthy rate, at the same time, scale across the business as well.

Steve Beauchamp (Co-CEO)

In terms of continuing to grow at 20%, I think Toby mentioned earlier, we're definitely focused on growth as, as a big priority for us. You know, what's going to drive that? We're going to make the investments in product. We talked about how we're excited about what we've got coming out and have a rich product pipeline. That is one of the key elements that gives us some confidence on being able to focus on that. Bringing in the talent from a sales perspective, 18% headcount increase, puts us in a really good position to be able to drive that. Huge TAM, right? We've got relatively low penetration in terms of the opportunity. It really comes down for us to be able to kind of execute. Size of the opportunity is big enough. We've got enough product differentiation.

We've got a great pipeline. I think as Toby mentioned, we have strategically made some, some smaller acquisitions, that also have enhanced our capability. I just answered the question around Blue Marble. When you put all that together, I think that's what gives us confidence in terms of being able to continue to grow at 20% plus.

Robert Simmons (Research Analyst)

Great. Thanks.

Operator (participant)

Thank you. Please stand by for our next question. Our next question comes from the line of Siti Panigrahi with Mizuho. Your line is open.

Siti Panigrahi (Managing Director)

Thank you. Thanks, thanks for taking my question. I wanted to ask about On Demand Pay. That's one something you announced long back, and now most of the competi- most of your competitors have that solution. How important is that for your cu- customer? Like, what sort of, like, we haven't heard from you any kind of traction there? Are you try- trying to revamp that product? You know, is it more to win, you know, help you win, or is that really generating revenue? Any, any color on that?

Steve Beauchamp (Co-CEO)

Yeah. You know, we were one of the first to market with our On Demand Pay product, so we've had that available several years. I would say that the customers that really see value in that often have, you know, larger hourly populations, where they will actually request early access to their wages, you know, fairly frequently. That product's worked really well for us. We've made, you know, based off customer feedback, some enhancements to the product on an ongoing basis. The product is doing well. I think from the first day that we launched it, I never said this was going to be a big needle mover. I really characterize it as a nice feature that customers could take advantage of, and I think that's kind of how it's played out for us overall.

I do think you need a product like that, and customers are getting value from it, but it isn't, it isn't a big driver for us.

Siti Panigrahi (Managing Director)

All right. Then I want to ask about the AI, as is, you guys announced that in March. Any, any feedback from our early adopters? Broadly, I want to ask, how do you think this HR and payroll industry will evolve as you start seeing this AI adoption, and where do you see your opportunity are to monetize for that?

Steve Beauchamp (Co-CEO)

Sure. I think if you just take a step back and you think of some of the big challenges that HR teams have, you've got a very dynamic workforce, Gen Z entering the workforce, gig work increasing, globalization kind of back on track and increasing as well. It's just a complicated environment for HR teams to really get the talent that they need in a fairly tight labor market. I think when you then overlay that with AI, AI creates opportunities for efficiency for HR teams. It creates opportunity to then use that time from efficiency to be able to drive a more engaging environment and actually really compete on a culture basis. We see our early clients doing that. They're communicating more with their employees, they're driving engagement.

We've got, you know, a ton of use cases that we plan on rolling out over time that will make it so much easier for communication, engagement, culture building initiatives. I, and I think that's going to be really important for our clients, as they will... attempt to win the war for talent.

Siti Panigrahi (Managing Director)

Thank you.

Operator (participant)

Thank you. At this time, I would now like to turn the call back over to Steve for closing remarks.

Steve Beauchamp (Co-CEO)

Well, first of all, thank you to all of you for dialing in and having interest in Paylocity, and I just want to kind of restate my thank you for all of our Paylocity team members, 6,000 strong, that delivered a fantastic fiscal 2023, and looking forward to another great year in FY 2024.

Operator (participant)

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.