Ladies and gentlemen, thank you for standing by, and welcome to the Paylocity First Quarter Fiscal Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to Ryan Glenn, Vice President of FP&A and Investor Relations.
Good afternoon, and welcome to Paylocity's earnings results call for the first quarter of fiscal 2020, which ended on September 30th, 2019. I'm Ryan Glenn, Vice President of FP&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 those 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 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 regards to our upcoming conference schedule, Toby and I will be attending the Stifel 2019 Midwest One-on-One Growth Conference in Chicago on November 7th and the RBC TMT Conference in New York on November 19th. Please let me know if you would like to schedule time with us at either of these events. Let me turn the call over to Steve.
Thank you, Ryan, and thanks to all of you for joining us on our first quarter fiscal 2020 earnings call. We are off to a nice start in fiscal 2020 with first quarter total revenue of $126.7 million, an increase of 26.1% versus the same quarter last fiscal year, marking our 11th straight quarter with total revenue growth in the mid-20s. Recurring and other revenue grew by 25.7%, driven by new client additions and an increase in average revenue per client as we continue to see positive momentum with our newest product offerings. Channel referrals, primarily from benefit brokers and financial advisors, once again represented more than 25% of new business for the first quarter.
We have continued investing in our broker and financial advisor partnerships, while also investing in channels more broadly, including recently announced partnerships with Compeat, a leading provider of restaurant software, and EvoShare, a micro-savings technology company. Adjusted EBITDA for the first quarter was $30.5 million or 24.1% margin, which exceeded the midpoint of our guidance by $1.9 million and represented a 100-basis point improvement from the same quarter last year. We remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal 2020, while also continuing to drive operational leverage in the business as we work towards our revised adjusted EBITDA margin target of 30%-35% of revenue. Last week, we held our annual Elevate Client Conference where we hosted a record number of attendees.
Clients and prospects were able to choose from over 100 breakout sessions focused on the needs of the modern workforce, including employee collaboration and communication, workforce learning, and other trends in the HCM industry. Additionally, our product and technology teams were on-site in our Connection Zone to introduce clients to the latest features of our product suite and to provide product demonstrations. A key theme at the conference was our commitment to providing innovative software that appeals to the modern workforce. Changing employee needs are driving HR professionals to transform the way they use technology to recruit, retain, and engage employees. Employees increasingly expect the technology they use at work to mirror the platforms they use every day. To that end, I'm pleased to announce the release of Community, an employee-focused social communication platform designed for clients to increase employee connection, engagement, and productivity.
It enables HR professionals and employees to share the most meaningful, timely, and relevant content with coworkers in a way that today's modern workforce expects. Early feedback has been outstanding. Clients have utilized Community as a platform for company-wide communication and collaboration to help build a better company culture, and they have leveraged insights provided around employee engagement and attitudes. Our clients have also received positive feedback from their employees who use Community as a way to collaborate on projects, connect with other employees with common interests, and drive broad-based participation in key strategic initiatives. Our commitment to product development continues to pay dividends in the marketplace, with our product suite being a key differentiator versus our competition. I would now like to pass the call to Toby to review the quarter's results in detail and provide updated guidance.
Thanks, Steve. Total revenue for Q1 was $126.7 million, an increase of 26.1%, with recurring and other revenues up 25.7% from the same period last year. As Steve noted, we continue to be pleased by the consistency we're seeing in our business, with Q1 marking our 11th straight quarter of total revenue growth in the mid-20s. Our adjusted gross profit was 71.2% for Q1, an increase of 120 basis points from the same period in the prior year, as we continue to focus on consistent revenue growth while also driving scale in our business model. 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 Q1.
On a dollar basis, our year-over-year investment in total R&D increased by 31%. On a non-GAAP basis, sales and marketing expenses were 25.7% of revenue in Q1, as we remain focused on incremental investments in this area of our business in fiscal 2020. On a non-GAAP basis, G&A costs were 15.1% of revenue in Q1 versus 16.6% in Q1 of last fiscal year. We remain focused on consistent leverage in our G&A expenses on an annual basis. Our adjusted EBITDA was $30.5 million or 24.1% of revenue for the quarter, which exceeded our guidance by $1.9 million at the midpoint and represented an increase of 100 basis points from the same period in the prior year. Covering our GAAP results, for the quarter, gross profit was $84.1 million, operating income was $6 million, and net income was $13.9 million.
In regard to the balance sheet, we ended the quarter with cash equivalents and invested corporate cash of $131.1 million, and we generated $8.3 million in cash from operating activities in Q1 as compared to $7.3 million for the same period last year. Finally, I'd like to provide our financial guidance for Q2 and updated guidance for fiscal 2020. For the second quarter of fiscal 2020, total revenue is expected to be in the range of $129.5 million-$130.5 million, or approximately 21%-22% growth over second quarter fiscal 2019 total revenue. Adjusted EBITDA is expected to be in the range of $30 million-$31 million. For fiscal 2020, total revenue is expected to be in the range of $567 million-$569 million, or approximately 22% growth over fiscal 2019 total revenue.
Adjusted EBITDA is expected to be in the range of $163.5 million-$165.5 million. In conclusion, we are pleased with our Q1 results, including the mid-20s revenue growth we've generated over the last 11 quarters, our ability to continuously demonstrate scale in our business, and the progress we're making towards our long-term financial targets. Operator, we're now ready for questions. Thank you.
As a reminder, to ask a question, you will need to press *1 on your telephone. To withdraw your question, press the # key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Pat Walravens with JMP Securities.
Hey, team. How you doing? This is Joey on for Pat. Thank you for taking our questions. Our first question was, we were wondering, what does adoption typically look like for new clients? Do they usually buy multiple products or start with one and add more later on?
Sure. I think that continues to evolve over time as we've expanded our product portfolio. As you know, all of our clients definitely start with payroll, very typical that they also buy HR as a component of that. Then I think probably some of the more popular modules after that at the point of purchase would be time and labor, benefits, recruiting, onboarding. We continue to see good traction in terms of being able to increase adoption across all of our modules for our new customers.
Awesome. Just on On-Demand Pay, how's the feedback been for that in particular, and then what does the adoption look like? Thank you.
Sure. We're very early in our release of On Demand Pay, so we have that available to a number of customers. They are actively using it, and we have employees that are requesting their pay in advance. We also have a number of customers that maybe are a little bit slow to adopt and are a little bit more reserved around that new feature. We think that it's a great benefit to employees. We're excited about the offering, and we think being one of the first to market with that new offering certainly helps from a differentiation perspective.
Thank you.
Thank you. Our next question comes from the line of Brad Reback with Stifel.
Great. Thanks very much. Steve, with another quarter under your belt as it relates to the down-market efforts, are the economics continuing to prove out as you expected?
Yeah, I think we were really excited with our unit growth last fiscal year kind of topping 20%. I think as we move into this fiscal year, we're seeing traction in that under 50 employee market. They continue to look at products like recruiting and onboarding, and many of our talent management products has actually been a differentiator of their ability to attract and retain talent. We're also seeing some of those smaller clients adopt our new product, like Community as a great communication portal for them. I think we continue to make progress there, and we continue to gain traction that we really started building last fiscal year into that segment.
Great. One quick follow-up. On the partnership side, as it relates to the channel, these new investments that you're making or these new focuses? Is that to sustain 25% of your leads from the channel, or does that, over time, have the ability to grow that to north of 25? Thanks.
Yeah, it's a good question. Most of our partner revenue today comes from brokers and financial advisors, with health insurance brokers being the biggest component. That, we wouldn't anticipate necessarily changing. We're starting to formalize some of those relationships, do some co-marketing with some of our partners, and as you can see, we're starting to extend the concept of partners to other potential partners. Compeat being a software provider in the marketplace, EvoShare being an add-on product for financial advisors. We think that it can help us both maintain that 25%+, as we continue to be able to grow, and potentially open new channels that could be interesting for us.
Great. Thanks very much.
Thank you. Our next question comes from the line of Brian Peterson with Raymond James.
Great. Thanks. This is Alex Zukin for Brian. There was a lot of discussion about the adoption toolkits at the user conference, and I'll maybe lump in the Community portal here as well. Could you just talk about if you see these products as being just valuable to improving usage and thus retention? Or do they fit into the broader efforts to sell back into the installed base over the next few years?
Yeah. I think it definitely fits into our effort to sell back to the install base and, of course, get broader usage at the point of purchase. If you think of the challenge a lot of the HR departments have, it's products like Surveys, learning management, some of our journal capability and performance management, impressions, and Community, is really employees interacting with other employees. Many times, the HR department doesn't know how to roll that out. How do I introduce it? What are the types of things that I'm going to be able to survey? How do I teach managers how to write great journals? This idea of incorporating best practices into our product, is one that we're really wrapping up into these adoption toolkits.
If I were a customer and I wanted to turn on a product like Community or Surveys, I'm actually going to be able to go into an adoption toolkit that will give you, here's the email you can send out to your employees. Here's how other clients are using this and gaining traction with it. Here's use cases that you can use. You could survey after a meeting to be able to get immediate feedback. You can use Community to make announcements. You could announce all your new hires to the entire organization. We're building in this concept of best practices. We're doing the same thing in learning management, and we're finding that it's giving customers ideas on how they can really take these kind of powerful capabilities and use them on an everyday basis.
What we're seeing is the clients that are doing that are getting much more employee usage. We definitely think this is the right strategy to drive utilization, and we're excited about the early reports from our clients.
Okay, great. Maybe one here for Toby. Last quarter, you talked about already being at your target sales rep count at the start of the year. I'm wondering if you could talk about if we should see scale to that line item over the course of the year, or should we expect you to move back to a more regular hiring cadence?
Well, I think what we've said before was that we were pleased with our ability to come into the year fully staffed, I think we had come into the prior year fully staffed as well, I think what we said was, we were happy that that was a little bit earlier than prior year, I think we would say that was days and weeks, not months and quarters. I think we feel pretty good about where we came into the year, the ability to be fully staffed a little bit earlier. I think as you can see by the results for the quarter, I think it reflects the sales momentum that we have. I think we feel pretty good as we're kicking off the year.
All right, great. Thank you.
Thank you. Our next question comes from the line of Samad Samana with Jefferies.
Hi, good afternoon, and thanks for taking my questions. I guess first maybe on the channel partner side, are there any noticeable differences in either retention rates or unit economics for customers that come through the partner channel versus direct deals? I have a follow-up.
Sure. As a reminder, it's our sales force that's creating these relationships with the channel partners and the individual brokers. The relationships are often less at the firm level, but at that individual broker level. One of the biggest benefits that we get is those individual brokers have relationships with the HR department and the decision-makers at the client, and therefore, when they bring us in as a trusted partner, we have a much higher close ratio for those. It's a very efficient channel from a sales and marketing perspective. On an ongoing basis, that broker, if they're talking to the customer or they're running into questions or they're finding that there's something that we need to be aware of, they do keep us in the loop. I wouldn't say that that necessarily translates to anything measurable from a retention.
We've got pretty consistent retention across the board. I'd say the primary benefit, though, is definitely the close rate on the front end.
Okay, great. Then, coming out of the conference and thinking about the PEPY, I think you guys have gotten to $400. You've set a new target range of getting to $500. I'm curious what you think that $500 represents of maybe what the total spend per employee is on HR technology and what the cap above that $500, or is $500 kind of the cap on where you can get to over time?
Yeah, I think that has evolved over time. I think if you look at product portfolios in our industry as a whole, they have expanded, and I think people are buying more products. Some of these products, we might not have been able to completely imagine in years prior. The fact that we're able to sell a Surveys product today, something very different than several years ago. The fact that we've launched Community as a product that's creating collaboration in a way we wouldn't have anticipated. I think our viewpoint is 500's a great next target for us, and we have initiatives that we are working on towards getting there. By no means do we think that that's where we have to stop.
We don't know exactly if there is a cap and where that is, but we're really convinced that if we continue to innovate, we listen to what our customers are asking for, that there's plenty of opportunity for new products.
Great. Toby, one, if I could just ask you, I'd be remiss not to, we had a 25 pip rate cut announced. I'm assuming that's factored into guidance for both next quarter and updated for the full year, or just any thoughts around that would be helpful.
Yeah. I think the short answer, Samad, is that yes, it is. We had anticipated that would come through, and that's fully incorporated into the guide.
Okay, great. Just wanted that clarification. Thanks again, guys.
Okay.
Congrats on the quarter.
Sure.
Thank you. Our next question comes from the line of Matt Fowle with William Blair.
Hey, guys. Thanks for taking my question. Wanted to ask on the sub 50 employee market, what are you seeing there in terms of competition? Is that market more competitive than the above 50 employee market? There's certainly probably a different set of competitors that you run in there, versus the above 50 market.
Sure. Yeah. I think ADP and Paychex are the biggest in the space. They're the ones that we would certainly run into the most, even more so in that below 50 space than maybe as you creep up towards the 1,000 employee market, which sometimes drags some of the more enterprise-oriented focused players. You also see a bunch of smaller independent payroll providers. There's hundreds of those across the country. I think it's a combination of ADP, Paychex, and then some of the smaller independents that we see primarily below 50 employees.
Got it. In terms of the new products that you're seeing the most traction with, anything you would call out there? I assume that some of the ones you were referencing was LMS and TPA, but anything to call out?
Yeah, I think we just launched LMS this summer. It's still relatively new. I think we're getting really good traction during our selling season in terms of the reports back from the sales force. I think people definitely are buying into the idea of sharing learning across the organization as being a challenge they're running into. We've been really happy with that as a new product. Community, we just launched formally at our User Conference. We definitely had a bunch of early adopters prior to that. We're seeing a growing number of use cases with that product. We have, I think, a lot of ideas in terms of being able to enhance that on a go-forward basis. Those would be the two I'd call out.
Great. That's it for me, guys. Thanks a lot.
Thank you.
Thank you. Our next question comes from the line of Mark Marcon with Baird.
Good afternoon, and thanks for taking my question. Just wondering with regards to the sub 20 employee market, can you give us any updated thoughts with regards to the approaches to that channel and what the expectation should be over the course of this year?
I think if you look at last year, where we grew units in that 20% range, we definitely had a bigger contribution of the under 50, and even some of that, as you indicate, Mark, under 20 employees. We're probably going to be a little bit more focused on that 10-20 employee range than maybe the sub 10 employees. At this point in time, sometimes our core sales force sells those accounts. Sometimes it's the newer emerging market team that sells those accounts. I think we also indicated that does take a while to build the channels, CPA being the primary channel in that market. I think we're early in continuing to build out more success. What we really like is the product resonates well with that marketplace. We understand how to build channels. We've done it really well in majors.
I think as we look past this first quarter, it's continued progress.
Great. With regards to channels, can you talk a little bit about the size of Compeat and EVO?
Yeah. I think the reason that we wanted to make sure that we called that out is really the concept here is you'll probably see us expand what was channels in the past. We were very squarely focused on financial advisors and brokers, health insurance brokers. One of the things is we're looking at other products they might interact with that could be potential partners. That's the EvoShare example from a financial advisor. They brought us into that relationship. We're also looking at potential software providers in different space. You've got a vertical market, restaurant-focused software provider that was looking for a partner. We thought that was going to be a great fit. We'll entertain options like that on a go-forward basis. I don't think I would call out any of those individually as being material. We think they're great relationships.
We're happy to have them. I think you'll see us continue to be able to expand the idea behind channels to go a little bit beyond financial advisors and brokers. That was one of the reasons we called it out.
Great. Last one, just in terms of what's embedded in the guidance, obviously, we saw the rate cut today. If we take a look at the interest income on the float, a little bit of a change relative to the pace that we've been seeing. How should we think about that playing out over the course of the year, anticipating that from here on out, there's going to be limited changes?
Yeah. Hey, Mark, it's Toby. I think I said a few minutes ago that we had incorporated that rate cut that we saw today into the guidance, and that's definitely true. We saw the Fed cuts. It looked like maybe there's a pause. We'll obviously see how that plays out over the course of the fiscal year. I think we feel good about the ability. If you go back to how we guided for the year initially, we had said we'd baked in two rate cuts, which we saw. We have now, with the updated guidance, which we've raised on both revenue and EBITDA for the year, baked in the third rate cut.
I think we feel generally pretty good about the ability to not just set what we thought was a pretty nice guide for the year initially that incorporated the rate cuts, but to take that up after the quarter, baking in the third. I think, again, feel good about the momentum and the consistency that we're seeing.
That's great. Thank you.
Yep.
Thank you. Our next question comes from the line of Siti Panigrahi with Mizuho. Your line is now open.
Hi. Thanks for taking my question. Steve, now since Q1 is now behind and post your user conference, I just wanted to get a sense of your confidence level this year versus last year in terms of customer demand or your product positioning or any competitive landscape. Also, where do you see most of the opportunity in terms of customer segment, whether in a down market or you're in a sweet spot, and is there any particular product that you think would drive incremental growth opportunity?
Yeah. Obviously we've been growing kind of in that mid-20s rate for a long time now. We were really happy with the first quarter in terms of performance from our sales team. That really drove our ability to increase revenue guidance for the year and drove the beat in the quarter. A really strong performance from our sales organization. That's always great in a recurring revenue business to get off to a great start. That's really positive. I think on the product side, equally excited about some of the newer offerings. I think they are creating some differentiation, which is also helping our sales force win business. The strength is coming across our size segment. We're doing well in the under 50 marketplace, but we're really doing well in our core market and at the upper end of our target market.
That's probably the most positive thing to take out of the first quarter, is we're seeing strength across the board.
When you think about getting new logos versus a cross-sell opportunity to your install base, what's the percentage right now, and do you think now that you have enough product sets now to go back and cross-sell to your install base?
Sure. I still think with the size of this market, 20,000 plus customers in a market of more than 600,000 businesses, we think there's still a huge opportunity to land new customers. That will be our primary goal as we move forward. At the same time, as we land those new customers, we are selling them more product. That's certainly helpful. Secondly, we will continue to gradually expand our efforts on selling products back to the client base. We have an inside sales team. They are selling products back to the client base currently. A lot of times at our user conference, clients that have been with us a while don't know that we've had these products over the last several years. We think it's a great opportunity, we'll continue to focus on selling back to the client base.
What I would tell you is, you're still going to see us focus on unit growth and bringing new clients to the platform first and foremost, and then think about the growth of sales back to the client base, maybe being faster than our revenue growth, but not being the primary driver.
I appreciate the color. Thank you.
Thank you. Our next question comes from the line of Drew Kootman with Cantor Fitzgerald.
Hi, thanks for taking my question. Just curious, tagging on that, you mentioned you're seeing strength in the upper end of your market. Maybe you could dive in a little more into that group.
Yeah. As you know, we focus on 20 employees to 1,000 employees, there's times where we even bring on customers above that 1,000 employees if we feel like they're going to be a fit, and they obviously feel the same way. We often will try to get our most experienced reps in front of those customers. We've had great retention of our most experienced reps, we've got a lot of confidence with those folks. I think when you look at some of our product initiatives, that has certainly helped us up market, having learning management, having Community, having products like that, I think, have really filled out the product portfolio. Obviously, if you look over the last three or four years, we've added compensation management, we've added recruiting, we've added expense management.
We feel like we've got a really strong portfolio for the upper end of our market, even stronger than two or three years ago. I think just the combination of having really experienced sales reps and a broader breadth in our product portfolio is what's driven the success up market.
Great. Now that you do have Community driving engagement, and that's more of the focus, maybe you could touch on, as much as you're willing to say, some of the new releases that you expect in the pipeline moving forward.
I think the way we like to talk about the releases is we get them in early adopter with our customers. We learn. We really believe strongly in client as a co-creator. We learn what they use, what changes they'd like to have to the product, and what features we need to add. We don't typically pre-announce. What I would tell you, though, is I think for Community, as an example, we've got a long list of features that we think we can add to that product to make that even more robust. We also think that there is a possibility at some point in time there might be a monetized premium version of that with some feature sets that are being asked.
That would be an example of something that we'll continue to look at from a roadmap perspective. But right now, it's a free offering. We're driving utilization, and we're focused on adding features based off client feedback.
Perfect. Thank you.
Thank you. Our next question comes from the line of Daniel Jester with Citi.
Hey, good afternoon, everyone. Thanks for taking my question. Just maybe to tie off that last one, you just had your user conference, spent a lot of time with clients. What are the one or two thematic things they're most focused on for the next year ahead?
Yeah. I think thematically, if you take a step back, one of the challenges I think that they have is really to be able to attract and retain talent in this type of environment. There's a lot of things facing the HR departments, whether it's the new generations and the younger generations entering the workforce, or millennials getting in decision-making positions, or the remote nature of the workforce, the gig economy and people moving from one job to the next. A lot of state legislation that's changing. What I would say is the one theme is there's a lot of change going on in HR. HR users are really trying to figure out how to be able to manage that and then become much more marketing-oriented in terms of how they treat employees.
I think the second thing is they're really looking for a partner to help them. This idea of service and partnership, adoption kits are a great example of things we're rolling out. They're really looking for more than just transactional advice and questions. They're looking for best practices. I think their world's getting more complicated, therefore they need a lot more advice, best practice, really aligns to some of the key initiatives that we're trying to drive towards.
That's really helpful. Thank you. Toby, in your script, I thought I heard you say that maybe you're making a little bit of incremental investments in sales and marketing. I guess first, did I catch that right? Second, if you are, can you share any color and kind of tie in how that could impact margins as the year progresses? Thanks.
Yeah, Daniel. I think what we have talked about with relative consistency has been the fact that we were continuing to invest in sales and marketing, in a relatively consistent way. It's one of the bigger growth drivers in the business, and our level of investment in sales and marketing has been pretty consistent over time. We've laid out the range in our financial targets, and I think our intention would be, certainly in the near term, to remain consistently invested in that sales and marketing line.
Okay. Thank you.
Thank you. Our next question comes from the line of Scott Berg with Needham.
Hey, guys. Congrats on good quarter. Thanks for taking my question. In my time, you'll see it's been, I think six days. I guess the one question I have is, as we did some customer work there and kind of thinking through the space is, how do you think about growth in the overall business, maybe over there in your immediate term of three, four, five years? Your core mid-market, you moved into this strategic, you're looking at 20 employees and a little bit lower. If we were to think about mix of bookings three to five years out, what does that look like? Say it's 95, four, and one maybe, or whatever the numbers are.
Yeah. I think it's probably more of a subtle shift than probably a big and different initiative. If you go back now, almost 3 years ago, I think we disclosed the fact that 50% of our clients had less than 50 employees. We've always been in that segment. I think if anything, we're seeing a little more traction in that 10, 20, 30 employee space than we've had before. In some cases, we think there's different ways to approach that market. That to me is more the subtle shift. We've always been really strong in the 50-500 and actually had a pretty darn good presence in that 500-1,000. I don't think that's changed. I think if anything, we've become a stronger competitor in that space based off the additional modules that we've added to our product portfolio.
At the same time, at the lower end, they're demanding a little bit more product. I just think more than anything, we feel better positioned today than we have several years ago.
Got it. I guess I'd be remiss of not asking an interest rate question. You guys took some interesting, or made some interesting changes around how you invest your funds. I think it was a year ago now, last summer, went into some slightly longer duration securities with slightly better yields. I know you'll probably tell me you're perpetually looking at different opportunities there, are you doing anything different today with those funds you're holding from clients maybe you did a year ago? Are there any opportunities to maybe change that composition to, again, drive a little bit higher yield maybe than some others in the space?
Hey, Scott. It's Toby. I think what you might be referring to is we, I think, just started investing a little bit in client funds, I think going back two years now. We haven't made any major changes over the course of that period of time in duration or any other sort of element of profile of that sort of investment strategy. I think that probably doesn't change a whole lot over the course of time. I think we're pretty consistent there.
Got it. Thanks for taking my questions.
Sure.
Thank you. Our next question comes from the line of Robert Simmons with RBC Capital Markets.
Hi. Thanks for taking the question. You touched on this topic a little bit, but could you go over what's your take on what Ceridian is offering in terms of the on-demand pay and the gig economy versus what you have?
Yeah. I'm not necessarily perfectly familiar with all our competitors are doing. I think this is a developing space, and I think my understanding is, I think Ceridian talked about having an offering in the new year available. What I would tell you, not specific to Ceridian, but there's a couple different approaches that people, I believe, can take and actually might be able to take both. One of the approaches is you go into the mobile app, you ask for any pay that you've earned. You will absolutely see real-time what you've earned from gross all the way to net in the application. It tells you what you've got available, and you say how much of that you want to be able to have.
We give a whole bunch of administrative tools to our clients so they can manage who they want to give this to and who they might not want to. We leverage direct deposit to put that into your account either later that day if you request it in the morning or the next day. That's one approach. A second approach could be basically a wallet or a card or a digital card, where those funds are put on that wallet/card, and then as disbursements are made from that card, either to the employee's bank account or you could use it as a card and actually make purchases. I think those are, generally speaking, some type of alternative network to direct deposit, are the two different approaches. We're starting with direct deposit. Doesn't mean that we can't do that second alternative over time.
I think those are the two approaches that are at least being discussed that I'm aware of.
Got it. Great. Thanks.
Thank you. As a reminder, ladies and gentlemen, to ask a question, please press star then one on your telephone. Our next question comes from the line of Arvind Ramnani with KeyBanc . Your line is now open.
Hi. Thanks for taking my question. One of the things that you talked about when we met last week was, there are a number of your customers where they're paying off basically more of the $200 PEPY level. How much of a focus is to sort of take those customers up closer to the $400 mark versus really going out and signing up new customers?
Yeah. I think, if you think a little more than five years ago, five and a half years ago, we were at $200 per employee per year. We've doubled the available product in that time period. Obviously, we have customers that have been with us well before that time frame, and we've added a lot of customers in the last five years. What I would tell you is, we want to make sure if a customer has a need, we're able to solve it. We have an inside sales team that we've grown faster than the rest of our sales force over the last two years, and their job is to identify customers that could benefit from some of our newer offerings. We're actively doing that.
I think if you were to look at our mid-twenties revenue growth rate, what I would tell you is a lot of that is still coming from unit growth. Although it's an important initiative for us, we think it's an opportunity that we can continue to grow. I would tell you that most of our growth is still going to come from landing new customers and selling those customers more, and then we get the benefit of continued sales back to the client base, and we'll continue to grow those teams.
Great. Not necessarily sort of asking for any sort of guidance, anything for 2020, but just sort of looking at where you are now and you look at the next couple of years, how do you feel about the business and are there sort of major areas of investments you need to make, either from a sales side or product side? Where does a major portion of investment really need to come? Or is it just equal across all areas of the business?
Yeah. I'm going to go back to one of the great things about the market that we're going after, is it's very large. Between 20 and 1,000 employees, there's 600,000 plus businesses. It gets even larger when you think of under 20 employees. We've only got 20,000 clients. We think we're in the very early innings of basically a land and expand strategy where we're really focused on landing new customers. We also feel really good about the product innovation that we've been able to drive over the last 5-plus years.
If you think of that, it's a matter of continuing to invest in our sales and marketing organization to be able to capitalize on that opportunity, combined with our R&D group, such that we can innovate and differentiate. Obviously, we've had great retention over the years, so that's the magic formula. We want to invest in R&D. We will invest in sales and marketing. We'll continue to drive great retention with our customers. In doing that, it's a natural scale business where we think we can hit those long-term targets that we put out there.
All right. Thank you very much. Thanks.
Thank you. I'm showing no further questions at this time. I will now turn the call back over to CEO, Steve Beauchamp, for closing remarks.
Well, I want to just take a quick second to thank all of our employees for all the efforts over this last quarter. We are in the middle of selling season and coming up to a very busy time with year-end. Of course, thank all of you for your questions and your interest in Paylocity. Have a great night.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.