Earnings Call: Q1 2021

Nov 5, 2020

Ladies and gentlemen, thank you for standing by, and welcome to the Paylocity Q1 Fiscal Year 2021 Earnings Conference Call. At this time, all participants' lines are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Ryan Glenn, Vice President of FP and A and Investor Relations. Thank you, and please go ahead, sir. Good afternoon, and welcome to Paylocity's earnings results call for the Q1 of fiscal year 2021, which ended on September 30, 2020. I'm Ryan Glenn, Vice President of FP and A and Investor Relations. And joining me on the call today is Steve Beauchamp, CEO of Paylocity and Toby Williams, CFO 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. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward looking statements. 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. Also, during the course of today's call, we will refer to certain non GAAP financial measures. We believe that non GAAP measures are more representative of how we internally measure the business and there is a reconciliation schedule detailing these results currently available in our press release, which is located on our website atpaylocity.com under the Investor Relations tab and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward looking non GAAP financial measure to the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule, Toby and I will attend the 2020 RBC Capital Markets Virtual Conference on November 17th and Steve and Toby will attend the 23rd Annual Needham Virtual Growth Conference on January 12. Please let me know if you'd like to schedule time with us at either of these events. With that, let me turn the call over to Steve. Thank you, Ryan, and thanks to all of you for joining us on our Q1 fiscal 2021 earnings call. We are off to a nice start in fiscal 2021, all things considered, with 1st quarter total revenue of $135,800,000 an increase of 7.2% versus the same quarter last fiscal year and coming in $2,300,000 above the midpoint of our guidance despite continued COVID related headwinds. Recurring and other revenue grew by 10.7%, and we continue to be pleased with our sales performance across each of our segments amidst a still challenging macroeconomic environment. While we are not fully back to the significant over performance we saw in the 1st 9 months of last fiscal year pre COVID when we saw 40% year over year increase in started sales, we continue to be pleased with our new sales activity and have gained momentum coming into selling season. September came in even stronger than July, which is one of our best sales months ever, and October was our single best new sales month in our history. Our sales team have successfully pivoted to a virtual selling environment over the last two quarters, we are very pleased with the effectiveness of these efforts and overall sales activity levels. Our success in virtual selling has been driven by improved website performance and digital lead generation, use of video throughout the sales cycle as well as an increased multimedia connection points, including podcasts and webinars. Channel referrals, primarily from Benefit Brokers and Financial Advisors, once again represented more than 25% of new business for the Q1, led by increased use of virtual broker connection activities, events and virtual gatherings that helped us maintain the strong source of referrals. Adjusted EBITDA for the Q1 was $30,900,000 or 22.7 percent margin, which exceeded the midpoint of our guidance by 10,900,000 dollars We are pleased with our ability to be efficient with operational and G and A costs, while we remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal 2021 in order to ensure we are well positioned to regain our growth momentum once we return to a more normalized macroeconomic environment. In September, we held our annual Elevate client conference, where we hosted a record number of attendees while shifting to a virtual format that provided more flexibility for clients to take in all aspects of the conference. General sessions include a discussion of our product roadmap and how our platform can help companies overcome HCM challenges, while breakout sessions focus on the needs of the modern workforce, including employee collaboration, communication, learning and other trends in the HCM industry. The key theme of the conference was our commitment to providing innovative software that appeals to the modern workforce. The changing landscape of work, which includes much of the professional world working remotely, has resulted in companies looking for ways to engage with their employees and provide opportunities to connect with coworkers in a more meaningful and efficient way. To that end, we recently announced the release of premium video, which will give clients the ability to record, upload and embed videos across our HCM product suite, giving them the ability to communicate more effectively with employees and prospective employees. Within Community, our social collaboration platform, users can upload or record company wide video announcements for heightened exposure and engagement. Video capabilities in our performance journals product allows users to record and share highlights with their managers via video outside of routine check ins. In our recruiting product, recruiters can swap words for video on their career pages and in job postings, making the hiring process more personal for candidates. The launch of premium video will increase our PEPY from $400 to $4.20 and we remain confident and committed to reaching our target PEPY of 500 We continue to believe video will play an increasingly critical role in transforming workplace communication and collaboration, and we are excited to leverage our video capabilities more broadly throughout our HCM product suite. In addition to premium video, during the quarter, we announced the addition of next generation touchless time clocks within our workforce management product. To support a safe and healthy return to the workplace, these time clocks offer real time, touch free temperature scanning with customizable attestations that facilitate an assessment of symptoms and wellness. We believe the addition of these next generation time clocks to our workforce management suite reinforces our commitment to helping clients navigate the COVID-nineteen crisis while providing flexible solutions that work best for modern workplaces. Our commitment to product development, including sustained investment in R and D, continues to be a key differentiator in the marketplace. We believe we offer the most modern platform in the market of more than 1,000,000 businesses with between 101,000 employees in the U. S. We remain committed to providing industry leading software by both expanding our product suite and adding features and functionality to existing products. I would now like to pass the call to Toby to review the quarter's results in detail and provide updated guidance. Thanks, Steve. Before reviewing our results, I would like to congratulate Steve on recently being named 1 of the 25 highest rated CEOs during the COVID-nineteen crisis in the U. S. By Glassdoor coming in at number 11. Congrats, Steve, well deserved. On our results, total revenue for Q1 was 135,800,000 dollars an increase of 7.2 percent with recurring and other revenues up 10.7% from the same period last year. As Steve noted, we were pleased to come in $2,300,000 above the midpoint of our guidance despite the anticipated COVID-nineteen related and interest rate related headwinds. Our adjusted gross profit was 69.4 percent for Q1, down from the year ago period given the COVID-nineteen and interest rate related revenue headwinds. We continue to make significant investments in research and development and to understand our overall investment in R and D, it is important to combine both what we expense and what we capitalize. On a combined non GAAP basis, total R and D investments were 17.3% of revenue in Q1 and on a dollar basis, our year over year investment in total R and D increased by 21.8%. On a non GAAP basis, sales and marketing expenses were 24.5 percent of revenue in Q1 as we remain focused on making incremental investments in this area of our business in fiscal 2021. On a non GAAP basis, G and A costs were 13.6 percent of revenue in Q1 versus 15% in Q1 of last fiscal year and we remain focused on consistently leveraging our G and A expenses on an annual basis. Our adjusted EBITDA was 30,900,000 dollars or 22.7 percent of revenue for the quarter, which exceeded our guidance by $10,900,000 at the midpoint. We remain committed to progressing towards our adjusted EBITDA target of 30% to 35% of revenue once we return to a normalized macroeconomic environment. Covering our GAAP results. For the quarter, gross profit was 86,400,000 dollars operating income was $3,400,000 and net income was $12,500,000 In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $242,700,000 We're pleased with our performance in Q1, which included another strong quarter for our sales team, helping us beat the top end of our revenue guidance. From a cost perspective, we remain focused on incremental investments to drive growth, while also identifying opportunities to demonstrate scale in operational and G and A costs, and we're happy with the progress we made to that end in Q1. In regard to client held funds and interest income, our average daily balance of client funds was $1,200,000,000 in Q1. We are estimating the average daily balance will be approximately $1,300,000,000 in Q2 and we assume an average yield of approximately 7 to 10 basis points in the Q2. Before reviewing guidance, I would like to provide some additional context on the current operating environment. As Steve mentioned, we have been pleased with the performance of our sales team this year and this past quarter. We have also been pleased with our momentum around new product development and the way our platform is resonating in the market. And though we have seen an improvement from the depths of the pandemic, including mild improvements in the number of employees on the platform, COVID-nineteen related headwinds continue to have a double digit impact on recurring revenue growth. Finally, I'd like to provide our financial guidance for Q2, which incorporates known and some estimated impacts related to COVID-nineteen. In regard to employees per client, our Q2 guidance incorporates the mild improvements we have seen through October, but no further increases during the remainder of the quarter. For the Q2 of fiscal 2021, total revenue to be in the range of $141,000,000 to $145,000,000 or approximately 7% to 10% growth over Q2 fiscal 2020 total revenue. And adjusted EBITDA is expected to be in the range of $26,500,000 to $29,500,000 In conclusion, we are pleased with our Q1 results, particularly in the context of the current operating environment, and we remain committed to investing in the business to ensure we are well positioned to regain our momentum once we return to a more normalized macroeconomic environment. Operator, we're now ready for questions. Thank you. Thank you. And our first question comes from the line of Brian Peterson with Raymond James. Your line is now open. Great. Thank you. This is Alex Sklar on for Brian. We obviously heard a lot on the product side coming out of your Elevate conference. I wanted to ask about some of the early feedback from your sales force coming out of the virtual conference this year. How have the product release has been received? And it sounds like you've done a lot on the virtual and sales enablement front. Is there any more tweaking still to be done on that inside sales motion? Or do you think you've had enough time past here where we should be continuing to see sales velocity improve from here? Thank you. Yes. I'll take the last part first. We've been really pleased with the performance of the sales team and the switch to complete virtual selling. I think as a reminder, our sales folks did operate from their home offices to start with. They were definitely used to being on-site with customers and so there definitely was a bit of a transition, but they were used to being remote. And a lot of the process was already very virtual, including the implementation process. So it was a shift for us. The team has done a great job. Really, We certainly moved some of our marketing focus to digital, and that's been very effective. The team themselves has really done a great job using some of the video capabilities to interact with clients asynchronously throughout the sales process. So I would say that we've made big improvements there. We're really happy with the sales momentum. Doesn't mean you can't always get better. I think that's always our mentality, but we're really pleased with the trajectory for the sales team as a whole. I think to your first question, I do believe that our focus on being the most modern platform, products like Community, the addition of premium video, all really resonates well in the marketplace. And the recent experience of people in the pandemic having to have more employees work from home is just further acceleration in that trend. All right, great. Thank you. And one for Toby, just a really significant EBITDA beat this quarter. I'm just wondering if you could help parse out if there was any piece of that upside around planned investments that just haven't materialized yet and are still to come or just better than expected revenue performance and efficiency gains? Thanks. Yes, it's a good question. I think it's a little bit of a few different things, some of which you mentioned. I think there's some level of timing there, certainly some revenue over performance, which drops right down. And then I think there's some elements of just the environment, which we've seen also from a cost sort of reduction or cost control standpoint relative to P and E being a lot lower and things like that. So I think it's a mix of those types of elements in the quarter. All right, great. Thank you. Thank you. And our next question comes from the line of Mark Marcon with Baird. Your line is now open. Hey, good afternoon and congrats on the results. Wondering if you can just talk a little bit about the headwind that you are seeing right now if you compare it on a per employee basis. Just how much of the head how much you mentioned that it's a double digit drag, but can you be a little bit more precise with regards to how much of a drag you're seeing, both from the combined effect of the lower interest rates as well as the lower number of employees per client? Yes. So the double digit impact from COVID is really ex interest. So we obviously break out interest revenue, so you can see directly what that impact is from the reduced rate cuts. But excluding the impact from interest rates, on recurring revenue and other, we're seeing about a double digit impact. And most of that double digit impact is really coming from the fact that clients have less employees on the platform. And so that's directionally, I think, the way to think about it. There's always other things in there that make up the difference, but I would be mostly focused on the fact that our clients just have less employees on the platform. And we saw a little bit of growth in that number in October, but it's very, very small and mild. And if you look at it over the last few months, it's fairly flat to just slightly up. Okay. And how are you thinking about the fall in terms of the number of employees per client? I'm imagining in areas like Chicago where restaurants are going to be dealing with the colder weather, There might be some that are going to be a little bit more challenged. How much of an impact are you expecting there? Yes. So I think we're trying to avoid forecasting the pandemic in our numbers because that obviously would be very challenging. And so as Toby, I think said in the prepared remarks, we took what we saw in October into consideration and then we looked at the rest of the quarter and assumed a relatively flat environment in terms of putting together our guidance. Okay. And then with regards to just the uptake with regards to premium video, I know it's really early days, but what are you seeing from that? How's the response been? Yes. So we launched it to our sales force, and they're, at this point in time, largely selling for January. Obviously, we have clients start every week and almost every day, but they're largely focused on January. And so that's where we're really starting to see that message resonate. We also have some of our current clients, some of those that came to our client conference and raised their hand and said, I'd love to be able to use that, actually take advantage of this. And what it really does is if you think about some of the challenges of remote work, some of it is the Zoom fatigue of meeting after meeting after meeting and the ability for you to be able to use communicate to company as a whole. You get much better take rate when they can digest that on their own schedule. And then we've obviously inserted into other use cases, recruiting for job positions as an example, onboarding new employees. And so, the clients that have started using it, I think are still early in that kind of life cycle of taking full advantage of it, the highest level of activity, small end, medium or large or Bell Bar? Well, we came into the pandemic growing 40% year over year in terms of new sales. So we came in with a lot of momentum. It feels like we're heading back towards that same type of momentum as we're going into selling season. I think it's a little more across the board to be honest with you. Good strength in the units in that under 50 marketplace for sure. Our core is really kind of that 50 to 500. And so they're doing well as well. And the more that we continue kind of that 50 to 500. And so they're doing well as well. And the more that we continue to add to our product, then I think we do create even a little bit more of an advantage in that 500 plus. And so, our folks who are most experienced in dealing with some of those large prospects are also having great success. Great. Congrats. Thank you. Thank you. Our next question comes from the line of Brian Vergheen with Cowen. Your line is now open. This is actually Jared Levine on for Brian. So has there been any change in terms of where prospective buyers are coming from? And in terms of that, any differences in terms of employer size as well with that question? Yes. I would say no difference in terms of our focus on employee size. We're seeing customers across the entire size segment of our target market. And we still have a very small level of penetration in terms of the total opportunity. So think of us as 25,000 clients, 1,000,000 plus businesses in our target market. And so we haven't necessarily seen our sales team shy away from the industries that you would think are affected. Maybe those are But I would say overall the market is just so large that we've got an opportunity to basically horizontally focus on any industry and that's really what we've been doing. Great. And then one follow-up. Did you experience an elevated level of out of business losses in the quarter compared to what you witnessed in 4Q? I think not enough to call out. I think, the easy way to think about it is COVID overall had that double digit impact to us. Certainly, some of that is potentially some clients going out of business at a slightly higher rate, but I would say that's a pretty small portion of that. Okay, great. Thank you. Congrats on the results. Thank you. And our next question comes from the line of Alex Fookin with RBC Capital Markets. Your line is now open. Hey, guys. Thanks for taking the question. So just two quick ones. I guess one thing we're trying to understand or better appreciate is given the incremental on an aggregate basis, on a macro basis, kind of stronger employment trends or a bigger bounce back, Why is that why is there a bigger disconnect between that and maybe some of the employment, the tailwinds that you would be seeing sequentially versus, let's say, an ADP or a Paychex? And then I got a quick follow-up. Yes. I guess, I think, overall, we can tell you what we are seeing with our client base. And I think, as we've looked at maybe some of the competitors that you're mentioning, there is a fair amount of consistency in terms of what I would call a quick little bounce back post early the spring when we really went down to the depths. And then as that bounce back happened, you see kind of saw August, September October be mild improvements. And I think that's been fairly consistent kind of across the board in terms of kind of what we're seeing. Maybe it's a little different month by month by the customer group that you've got, but I think that's exactly what we're seeing in our client base. And it seems to be reflecting what you see from many of our competitors. Got it. And then if you think about sales cycles and bookings trends, it sounds like they were sequentially better. But if you think about the is it a are you seeing sales cycles actually shorten on a relative sequential basis? Or are you seeing them lengthen because less people are willing to switch providers in the midst of a pandemic. I'm trying to understand if are they better appreciative of a value prop and virtual selling is driving more people to buy faster? Or is it the unwillingness to switch? Yes. I guess I wouldn't be as focused on how quickly it takes to get a customer to agree in that timeline. That has not changed that much. I understand the point of the question, which is if you are doing this virtually, maybe you could be more efficient and you can run through these sales faster. But sometimes it takes customers time to make the decision. They might want to get the CFO to buy off on it. There's steps in the process that I think naturally have to happen and need to be scheduled. And so we haven't seen a big velocity increase. I think what we've seen as we've moved into selling season, we're just running more appointments appointments and more opportunities. And I think the message about being ready to connect with your workforce in a variety of different ways that might be different than what you thought of 6 or 8 months ago is resonating. Perfect. Thank you, guys. Thank you. And our next question comes from the line of Adam Borg with Stifel. Your line is now open. Hey, guys, and thanks for taking the questions. Maybe just on the community product, I was hoping you could talk a little bit more about how engagement has been trending and just further opportunities to monetize that product over time? I know you talked a little bit about integration with premium video. And then I had a follow-up. Yes. So our community product, as a reminder to everybody, is really a social collaboration tool within our platform that's available to all of our clients for free. We've enhanced that product over time. So we added an Ask the Expert capability where you can ask the HR department questions. We have a whole bunch of announcement capabilities that you allow you segment your audience and be able to reach your audience and look at analytics on the back end of how effective that's been. And so as we continue to enhance the product, we've definitely seen utilization increase. And then of course, you take the impact of the pandemic, which also increased utilization. And so I think clients are really taking advantage of that. I'd say the ability to run announcements, whether that's sending out videos, whether that is emailing announcements and being able to see people comment and react is probably the most popular feature in the product. Well, that's really helpful. And then maybe just thinking back on some comments made earlier about relative strength down market below 50. I'm just curious, when you think about the buying patterns at the small end of the market, have there been any changes in terms of the types or the number of modules that these businesses have been selecting during the pandemic? Thanks again. I would say down market community, has become a more important part of the conversation than what we saw before, because oftentimes with the smaller clients, they don't necessarily have maybe the time to go and pick 4 or 5 different products. So the idea of having a singular platform to be able to do everything in is I think it's powerful across our entire segment. It's particularly powerful in that under-fifty marketplace. And so now they're trying to figure out how do I communicate in this ever changing environment with people who are working from home and have different schedules and the ability to have everything in the employee's hand with the mobile app is really key and important. And so I think that has resonated even more because of some of the changes that we've seen in the macro environment. Really helpful. Thanks again. Thank you. Thank you. And our next question comes from the line of Siti Panaghi with Mizuho. Your line is now open. Hey, I apologize if this has already been asked. This is Len to postpone for Citi. Just wanted to ask about characterizing the competitive landscape given ADP had said their retention rate has sort of improved and now Paycom is trying to go down marketing to that under 50 employee segments. So I just wanted to see how you would characterize the competitive landscape? Thanks. Sure. Yes. So I think I'd go back to the fact that we've got about 25,000 clients. There's more than 1,000,000 in our target market. And so I'm not sure slight changes like you're talking about in the competitive landscape we feel. We've seen our activity levels increase at a very healthy rate going into our key selling season. We've seen that across all of our size segments that we focus on. And so and we're competing against the kind of the same folks that we would normally compete against. And so I wouldn't say we see a big change in who we're competing with. We haven't seen a big change in terms of the players in the market or how effective we are against them. And our next question comes from the line of Arvind Raimani with Piper Sandler. Your line is open. Thanks for taking my question. I just wanted to ask about this competitive environment as well. From a product perspective, are you seeing some of the traditional players enhance the technology to become more competitive? Or you feel like your product enhancements continued product enhancements is able to keep maintain the distance between the traditional players and your offering? Yes. So I would say, 1st of all, definitely a competitive environment. It's always been a competitive environment. And we certainly have competitors that have been in this business a long time and clearly are making investments in technology as well, which is why we go back to our investments R and D and our ability to innovate and stay ahead of our competition, we think is really extremely important part of our strategy. And so I think the second part of the question is, yes, we do believe that we've got a lead in the marketplace. We do believe that we continue to gain share. We had 20 plus percent unit growth last fiscal year, and we're continuing to build momentum in the selling season. So we're seeing our solution resonate. Thank you very much. Thank you. And I'm not showing any further questions on the phone line at this time. So I will now turn the call back to management for any closing remarks. Great. Thank you very much. Well, I'd like to just thank everybody for their interest as usual in Paylocity. And then a quick thanks to all of our employees for all the hard work and effort that they've done managing these challenging times and being there for our customers. I'm truly appreciative of everything that they've done for us and their continued effort and focus on making Paylocity a success. So with that, I hope everyone has a great night. Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.