Earnings Call: Q3 2018

May 3, 2018

Good day, ladies and gentlemen, and welcome to the Paylocity Holding Corporation's Third Quarter Fiscal 2018 Results Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. As a reminder, today's conference maybe recorded. I'd now like to introduce your host for today's conference, Mr. Ryan Glenn, Senior Director of Finance and Investor Relations. Sir, please go ahead. Good afternoon, and welcome to Paylocity's earnings results call for the Q3 of fiscal 2018, which ended on March 31, 2018. I'm Ryan Glenn, Senior Director of Finance 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 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks and this discussion, 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 at paylocity.com under the Investor Relations tab filed with the Securities and Exchange Commission. The nonrevenue financial measures we will discuss today are non GAAP unless we state the measure as GAAP. 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 regards to our upcoming conference schedule, Toby and I will be attending the SunTrust 2018 Internet and Digital Media Conference in San Francisco on May 8. Steve will be attending the Baird Global Consumer Technology and Services Conference in New York on June 6. And Steve and Toby will be attending the William Blair Growth Stock Conference in Chicago on June 12. With that, let me turn the call over to Steve. Thank you, Ryan, and thanks to all of you for joining on our Q3 fiscal 2018 earnings call. We had a very good quarter with total revenue of 113,400,000 dollars an increase of 25.6 percent versus the same period last year. Recurring revenue grew by 25.7 percent driven by new client additions, improved HCM product penetration and an increase in interest income on funds held for clients. The 3rd fiscal quarter represents our largest quarter of new client starts as many companies prefer to switch providers at the start of a calendar year. We were pleased with the volume of new sales in the quarter and the execution by our implementation teams in onboarding our new clients. We also continue to generate more than 25% of our new business revenue from the broker channel, which has remained consistent over the last several quarters. Our sales performance for the quarter was a key factor in our ability to increase revenue guidance for the fiscal year by $4,000,000 our largest increase in the last two fiscal years. Adjusted EBITDA in the 3rd quarter was 35,800,000 dollars or 31.5 percent of revenue, expanding from $26,800,000 or 29.7 percent of revenue in the Q3 of fiscal 2017. As a reminder, the 3rd fiscal quarter is our highest margin quarter due to the recurring fees collected for W-2s and annual tax form filing. Calendar year end is a very busy time of year requiring significant operational planning and coordination to handle the increased volume of client interactions. We continue to make investments in a variety of cross functional process improvement initiatives, which has allowed us to improve the client experience as we continue to grow our product portfolio. These investments along with our continued focus on product innovation has allowed us to consistently maintain revenue retention above 92%. During the Q3, we completed the acquisition of a 3rd party benefit administrator, Beneflex, welcoming 36 employees to our organization. Beneflex provides us the opportunity to offer flexible spending accounts, health savings accounts and health reimbursement accounts to both our current clients and new prospects. We believe these additional products will strengthen our value proposition with the broker channel, who in the mid market typically refer clients to a number of local and regional third party providers. We are actively developing a seamless employee experience that provides savings account data to our mobile and online platforms, employees already logging onto our mobile and online platform, we believe the addition of the FSA and HSA data will provide a differentiated user experience centered around convenience and ease of use. We have also increased our total investment in R and D by 24.6% over the Q3 of last fiscal year when you consider what we expense and capitalize. The investments in R and D and the strength of the product offering continue to be the number one reason clients switched to Paylocity. Clients are increasingly searching for a solution to automate manual processes, while also driving employee engagement as they modernize many of HR interactions. Our investments in benefit administration and talent management are specific examples of how we are addressing these client needs and also represent an opportunity to drive increased product adoption and further increase the realized average revenue per employee per year. In addition to our strong focus on investing for growth, we also remain focused on our culture. Paylocity was recently recognized as one of the 2017 best and brightest companies to work for in the state of Idaho based directly on employee feedback. This is the 2nd year in a row we've won that award. We have been very pleased with our expansion in Boise and have quickly grown the number of employees to well over 100 since we entered the market a little more than 2 years ago. We are particularly excited about the prospect of continued growth there as we scale our operational and technology teams and move into our brand new building early next fiscal year. With this award, we have now won 2017 Best Places to Work award in all of our major centers. We believe these awards are important as they highlight the Paylocity culture and allow all of our employees to feel empowered and engaged in delivering industry leading software and service. In the Q4, we are also continuing our expansion into our new corporate headquarters in the Chicagoland area, with the majority of our employees moving into the new facility by early June. Before I pass the call on to Toby to review our results in detail, I would like to thank all of our employees for their hard work and dedication during our busiest quarter of the year. Thanks, Steve. Total revenue for the quarter was $113,400,000 which represents a 25.6% increase from the same period in the prior year. For the Q3, our total recurring revenue of $108,600,000 was up 25.7% from the year ago quarter and represented 96% of our total revenue. Recurring fees were up 24.1% in the quarter, and interest income on client funds was up 161.2 percent year over year as a result of balance increases, increased average interest rates and because we are currently investing approximately $100,000,000 of client funds in high quality available for sale securities. Implementation services and other revenue was $4,800,000 for the 3rd quarter, up 23.3% from the year ago quarter. Our adjusted recurring gross profit on recurring revenues was $86,000,000 or 79.2 percent in the 3rd quarter, up from $67,000,000 or 77.6 percent in the year ago quarter, which is a 160 basis point improvement. Adjusted gross profit in the 3rd quarter was $79,600,000 representing an adjusted gross margin of 70.2% as compared to 61 point $7,000,000 or 68.3 percent in the year ago quarter, which is a 190 basis point improvement. If I turn to our operating expenses. As Steve mentioned, we continue to make significant investments in research and development. And to understand our overall investment in R and D, it's important to combine both what we expense and what we capitalize. On a combined non GAAP basis, total R and D investments were $12,400,000 or 10.9 percent of revenue in the 3rd quarter compared to $9,900,000 or 11 percent of revenue in the year ago quarter. On a dollar basis, our year over year investment in total R and D increased by 24.6%. On a non GAAP basis, sales and marketing expense was $24,400,000 or 21.5 percent of revenue in the 3rd quarter compared to $19,500,000 or 21.6 percent of revenue in the same period last year. On a non GAAP basis, G and A costs were $14,700,000 or 13 percent of revenue in the 3rd quarter compared to $11,800,000 or 13 percent of revenue in the year ago quarter. Through the 1st 9 months of fiscal 'eighteen, G and A costs were $41,300,000 or 14.7 percent of revenue compared to $34,000,000 or 15.2 percent of revenue for the same period last year, which is a 50 basis point improvement. We continue to be confident in our ability to leverage G and A costs on an annual basis, and we remain focused on our long term target G and A range of 10% to 15% of revenue. On income and loss, our adjusted EBITDA was 35,800,000 dollars or 31.5 percent of revenue for the quarter versus $26,800,000 or 29.7 percent of revenue for the year ago quarter, which is a 180 basis point improvement. On a dollar basis, adjusted EBITDA increased by 33.3% over the Q3 of last fiscal year. Through the 1st 9 months of fiscal 'eighteen, adjusted EBITDA was $65,600,000 or 23.4 percent of revenue compared to $44,700,000 or 19.9 percent of revenue through the 1st 9 months of fiscal 'seventeen, which is a 3 50 basis point improvement. On a dollar basis, adjusted EBITDA is up 46.8% through the 1st 9 months of fiscal 2018 compared to the same period last year. Briefly covering our GAAP results. For the quarter, gross profit was $74,800,000 Operating income was $20,500,000 and net income was $39,200,000 I also want to address our valuation allowance. In fiscal 2014, we established a valuation allowance against certain deferred tax assets. And in this fiscal year, we have previously indicated the possibility of releasing the valuation allowance based on the financial performance of the business. During the Q3, we continued our assessment of the factors relating to maintaining or releasing our valuation allowance. And given our strong financial performance, including net income in each quarter of this year as well as other factors, we have released substantially all of our valuation allowance against deferred tax assets, the impact of which is a onetime noncash tax benefit to net income of $22,600,000 in the 3rd quarter. With respect to taxes more broadly, Paylocity is not currently a cash payer of corporate federal income tax. That said, we continue to review the potential impacts of the new tax legislation on our business as we may become a payer of cash corporate federal income tax in the future periods. On a percentage basis, for P and L modeling purposes, we currently estimate our effective tax rate to be in the mid-20s for the Q4 of fiscal 'eighteen and for fiscal 'nineteen. Please note that as we have released substantially all of the valuation allowance, we will no longer provide guidance on non GAAP net income given its potential variability quarter to quarter from onetime tax items and because it does not represent a key financial or business performance metric used to manage the business. We will continue to provide guidance on revenue and adjusted EBITDA as these represent both the key financial metrics we use when assessing financial performance of the company, and we believe these are the most meaningful measures of our financial performance. With respect to the balance sheet, we ended the quarter with cash and cash equivalents of $129,500,000 as compared to $101,500,000 as of the end of the Q3 of fiscal 'seventeen, which is an increase of $28,000,000 or 27.6 percent. From a cash flow perspective, we generated 35,200,000 dollars in cash from operating activities in the Q3 of fiscal 'eighteen as compared to $27,900,000 for the prior year 3rd quarter, which is an increase of $7,300,000 or 26.2 percent. Finally, I'd like to provide our financial guidance for the Q4 and updated guidance for fiscal 'eighteen. Please note that ASC 606 will be effective for Paylocity in fiscal 'nineteen, which begins on July 1, 2018. As such, the following guidance does not reflect the impact of ASC 606. So that said, for the Q4 of fiscal 2018, total revenue is expected to be in the range of 92,600,000 dollars to $93,600,000 or approximately 22% to 23% greater than the prior year, and adjusted EBITDA is expected to be in the range of $14,000,000 to 15,000,000 dollars For full fiscal year 2018, total revenue is expected to be in the range of $373,500,000 to $374,500,000,000 dollars or approximately 25% greater than the prior year and at the midpoint, an increase of $4,000,000 from our prior guidance. And adjusted EBITDA is expected to be in the range of $79,600,000 to $80,600,000 or approximately 21.4 percent of revenue at the midpoint, which is an increase of 2 70 basis points from fiscal 'seventeen and an increase of $3,600,000 from our prior guidance. Overall, we're very pleased with our financial results through the 1st 9 months of fiscal 'eighteen, including our ability to provide guidance of 25 percent revenue growth 2 70 basis points of adjusted EBITDA expansion this fiscal year. Operator, we're now ready to begin the Q and A session. Thank you. Our first question comes from the line of Justin Furby with William Blair. Your line is now open. Thanks for taking my questions guys and congrats on a nice quarter. I had two questions, I guess both for Steve. First, could you give an update on sort of last quarter you mentioned you wanted to pull forward some sales hiring. Can you give a sense on where that stands versus a year ago? And then I've got one quick follow-up. Thanks. Yes. So if you remember, we typically start our hiring process in the spring for next fiscal year. Last quarter, I called it the fact that we'd like to get a little bit of a jump on that, call it a month or a matter of a few extra weeks, which is always helpful for us. I think overall, I think the important point is we feel good about where we are today from a hiring perspective going into next year and we'll give more color in terms of number of reps on our next call. Okay. And then I guess just more big picture. I was wondering if you think about today and sort of your growth rates in the mid-20s, and you compare it to a few years ago before ACA when you were sort of high 30%, 40% grower on a much smaller base. I guess I was wondering if you think it's any harder or easier to grow today versus a few years ago? And then I guess some of the factors I'm thinking about when I ask that are competitive changes, your product and how it's evolved and any other things that come into play? Thanks. Yes. So I think it's always been a competitive environment. So there's no difference from my perspective today in terms of we've always competing on deals. It's never typically been just us in a deal. So I don't think that's really a lot different. Certainly with size and scale, from a percentage perspective, it does get harder to grow at the same rate over time. But we feel really good that there's a big enough market opportunity. We've got the right product and that we can stay focused on growing 20% plus, which has ultimately been our long term model. And we've actually posted 3 quarters in a row with 25% growth, which is also makes us feel good. So big enough opportunity, the right products, and so we feel we'll stay focused on 20% plus as we move forward. Got it. Thanks very much. Our next question comes from the line of Scott Berg with Needham and Company. Your line is now open. Hey, Steve and Tobey, congrats on a nice quarter as well. Two brief ones for me. First of all, Steve, can you talk about maybe the Beneflex acquisition a little bit now that you've had it in your hands and you have a chance to look at the operations under the cover a little bit. But kind of curious to know about the sales motion, how it gets sold now? Is it any different than your first assumption? Is it all going to be upsell, maybe changes in pricing or something? Yes. So I think we're still early in the integration process and we are really focused on developing a solution that will be completely integrated into our platform. So our vision is that an employee would be able to log into mobile or into our portal. They'd be able to see their HSA or HRA or FSA balance. They'd be able to see that kind of as they're walking into the pharmacy and point of purchase and know exactly how much money they have to spend. We think that's a key part of the value proposition. So we're actively working on product. At the same time, we're finalizing a go to market strategy and have included the headcount we need in our hiring plans during our normal sales hiring spring timeframe. And so both of those things are in motion and we hope to give more color as we get through the integration in terms of what that launch strategy looks like. But right now, we're really focused on integration. Great. My follow-up question would be on you mentioned seasonal nature of Q1, you get a lot of customers that want to go live at the 1st of the year. But did you see any changes in those customers in terms of the modules that they were buying, how that they're buying, anything that might be interesting to note? Yes, sure. I think we continue to get more adoption across our HCM components. I think that's been happening for the last several years. I think one of the things I called out last earnings call is we're starting to see that even down market where we have a number of customers below 50 employees and we're seeing greater adoption from our customers below 50 employees and we're seeing greater adoption from our smaller clients in our target market all the way to the top end of our target market. And we're certainly seeing really good traction with many of the talent management modules that we've released and that along with benefits have been big contributors in terms of driving higher adoption. Great. That's all I have. I'll jump in the queue. Thank you. Thank you. Our next question comes from the line of Ross MacMillan with RBC Capital Markets. Your line is now open. Thanks so much. Steve, you had mentioned last quarter that you'd seen a bit of a modest but slight bias for your sales reps to sell a little more down market in the first half of the year. And I was just curious now that we've got another quarter behind us, was there any notable change in that, anything to call out there? Yes. So I think it's important to note that our sales reps are driven off annual quota of reoccurring revenue. So there is no unit quota focus to it. And so our sales reps will kind of focus on where they see the best opportunity and that does move around quarter per quarter. I think the important point was to call out the fact that we're seeing broader adoption of our HCM products down market. So we think our solution is resonating even more than maybe it has in the past. Some of these newer modules are being adopted by 30, 40, 50, 60 employee customers at a higher rate, which we think is great. And that in some way has resulted in a slight mix shift, which you'll see as we report our year end client numbers next quarter. But it's pretty slight. And so I would say nothing major to call out. We feel good about the quarter. We feel good about the sales performance in the quarter and this is just a mix shift that we have seen this fiscal year. That's helpful. And then just maybe a clarification for me on your customer float and you said $100,000,000 in available for sale securities. I wasn't clear if there was any change in the investment strategy on the float with regard to money market sweeps or other items that you're trying to call out there, maybe just a clarification. Ross, it's Toby. No change there at all. I mean, it's pretty much the same as it was last quarter in terms of the split between what's invested in available for sale securities, no change in strategy whatsoever. Great. Thank you. Congrats. Thanks. Our next question comes from the line of Brian Peterson with Raymond James. Your line is now open. Thanks. This is Vince Valentano on for Brian. I just want to know, have you seen any increased interest from new broker partners looking to partner with you relative to prior periods? And how penetrated do you think you are into a potential broker network? Yes, I think I called out on the prepared remarks that we were once again over 25% of our business comes from brokers. That was for the quarter and for the year. And I think if you go back, it's been pretty consistent for the last several quarters. And obviously, we continue to grow the business. So that does require us to add new broker partners and then continue to deepen the relationship with the existing partners. We think there's still a great opportunity in the broker channel. They're definitely looking for technology partners. It's an important part of their value proposition. And so we still think this is a great opportunity for us going forward. Okay, great. And then just wondering if you had any thoughts on the linearity of the bookings profile that are worth noting? No, I mean, I think what I've said in the past is, when I get the questions about bookings is you can kind of look at the results that we posted and typically the variations come from our sales organization. So our ability to have the largest raise that we've had in the last 2 years and be able to raise revenue guidance by $4,000,000 means we definitely had a good quarter to be able to do that. And there's times where we kind of meet expectations and that means we've got to have a decent quarter from our sales organization to meet expectations. So I think my color would be good last quarter and biggest raise in the last 2 years tells you we're pretty comfortable with it. Our next question comes from the line of Pat Walravens with JMP Securities. Hi, this is Matt Spencer on for Pat. Thank you for taking my question. What areas of HR software do you not address today that you think you might be addressing in 3 to 5 years? Sure. So I think if an organization were to buy all of our product portfolio, they would pay us about $3.20 per employee per year. As a frame of reference, that's up from $200 per employee per year at the time of IPO 4 years ago. And so we continue to develop new products. We continue to focus on organic development of those new products. We don't give specific targets in terms of what that number might ultimately be. We definitely think there's room for enhancements there. We're actively working on working on integrating the HSA and HRA into that and that's going to be a bump on the total available sale opportunity. But I would tell you that I think there's new product addition opportunities in pretty much all categories except for maybe payroll, which is more compliance and government driven. So from an HR perspective, talent management, time and labor and benefits, we think there's incremental product opportunities in all those categories. Great. Thank you and congratulations. Thank you. Our next question comes from the line of Brad Ryback with Stifel. Your line is now open. Great. Thanks very much. Steve, have you guys thought at all about segmenting the sales force? I know in answer to Ross' question, we talked about not having a unit goal, just a dollar goal. But in an effort to maybe get more productivity, more segmentation, could that help? Yes. So it's a good question. I think it's something that we've looked at historically every year and we've experimented at times very small places with different approaches. But we've been pretty consistent in terms of having a geographically based divided sales force. We're in the planning process right now. We're in the hiring process right now for next year. So we'll look at it again. But at this point time, we haven't made any decisions around segmentation. Great. Thanks very much. Our next question comes from the line of Corey Greendale with First Analysis. Your line is now open. Hey, thanks. This is Ken Wang on for Corey. Congratulations on a strong quarter. Thank you. So just wondering, can you any comments you can offer just on the Beneflex acquisition? Does this increase the potential annual revenue per customer figure? Yes. Yes, sure. So I think as I said earlier, we're definitely focused on integrating the acquisition and then putting together the right operational sales and product launch plan. And so we're actively working on that. We feel good about what we're going to be able to deliver to the market. It will increase that $3.20 per employee per year. We haven't finalized our pricing strategy yet. So as we do that, we will certainly update you. And we think there's an opportunity to sell this both to our current clients, as well as new prospects. And in addition, it does offer a strong value proposition for our broker channel, who today spend a lot of time referring different smaller TPAs for these mid market clients. And the value of having all of the data in the same platform with their paycheck and with their time off and with their time and labor data and benefit data, we think provides differentiation in the marketplace. So we're excited about the opportunity. Great. Thanks. And then just switching gears. So I know you've done a lot of recruiting on the sales force side. Anything you can offer just in terms of commentary on the recruiting environment? Sure. So this is a very busy time of year for our recruiting team and our sales team in terms of hiring, and we felt like we got off to an earlier slightly earlier start than prior years. And if I compare where we are today versus prior year, it's pretty similar. Feel pretty good about the number of hires that we've already got in. As you know, the earlier we can get our hiring done, which we typically like to get completed by the end of the summer, the earlier we get those people on, even a month or 2 certainly helps from a productivity perspective, especially when you consider that January sales, the people starting in January is a big time of year. So it's important for us to get the right quality people first and foremost, but I'm very happy with the progress so far. Great. Congratulations again. Thanks. Our next question comes from the line of Eric Lemus with SunTrust Robinson Humphries. Your line is now open. Hey guys, nice job on the quarter. I want to follow-up on the last question in terms of Benefix. It seems like it's a good opportunity for the broker channel. So can we think about this as potentially being a catalyst for having the broker channel to be above 25% of sales? And then secondly, on Beneflex, any sort of idea on the timing of the integration? Yes. So, I think, we don't typically give timing on new product launches before we get there. I would tell you that we're actively making and we don't want to be in a situation where we introduce this product to the brokers and have any hiccups. So, I don't have any specific timing. We'll update you next quarter in terms of what that might look like, but I would tell you we feel good about the progress that we're making. I think from a value proposition perspective, it's incremental in the broker channel. I don't think necessarily dramatically changes our trajectory. But more importantly, it creates a significant ARPU and additional revenue opportunity as we bring on new customers that are either referred to us from brokers or we find obviously on our own and also gives us an opportunity to sell back to the current client. So I think that's probably the biggest part of the opportunity, but it is certainly incremental in the broker channel as well. Okay, great. Thanks, Steve. Our next question comes from the line of Siti Panaghi with Wells Fargo. Your line is now open. Hi, guys. Thanks for taking my question. Just on the sales and marketing expense line, that jumped 25%. And you talked about besides sales rep, you talked about investing and marketing mainly in the lead generation last quarter mainly in the second half. Could you give some color like what sort of activity happened and how much that triggered some of this like your guidance increase and how should we expect how should we think about the sales and marketing spending for Q4 and going forward? Yes. So I think on the last call, we highlighted the fact that we wanted to take advantage of our strong EBITDA performance in the first half of the year to give the go ahead to our sales organization to start hiring a little earlier than they had in prior years. And I think at the time, we indicated that the bigger part of that impact would likely be the 4th quarter versus the Q3. So I would tell you that a lot of that sales and marketing spend is really about recruiting efforts to bring on candidates as early as possible and get to full headcount as early as possible as we go into next fiscal year. I think there's always marketing initiatives that we do and can vary quarter by quarter, but I think the bigger part of the year over year change is driven by sales headcount. And also it's good to see success from the down market that you talked about below 50 employees. But have you seen any change in competitive landscape on your core market like 120 employees or so? Sure. Yes, I think it's always been competitive is the first thing that I would tell you. And it's pretty rare for us to ever be the only person they're evaluating us in the incumbent. They are typically going to evaluate 2, 3 or even maybe 4 people as they go to market. So, I think it's the usual people that we typically see as well. So, no necessarily newcomers that are coming onto our radar screen. But from our perspective, we focus on our own execution. So how do we execute within our sales force? How do we make sure that we're delivering the right service and product experience to the clients? And then make sure that we're we've got the right people representing that to prospects. We feel good about our ability to win in the market and continue to grow. So it's always been competitive. It's still competitive today. Okay. Thank you. Our next question comes from the line of Avi Lamba with Mizuho Securities. Your line is now open. Hi, guys. Thanks. This is Parthav on for Abhay. Congrats on the results. Just in terms of the contribution from Beneflex, how much were they doing on the top line and on the cost side of things? And is any of the guide up for the full year on either revenue or adjusted EBITDA coming from the acquisition? Sure. So, I would say the acquisition was relatively small from a revenue perspective. Obviously, we highlighted the fact that there was 36 employees. From a cost perspective, we'll give you some indication. I would say if you look at our full year guidance for the year and you annualize the potential impact of BENEFLEX, it's certainly less than 1% of our revenue. So it certainly does have an impact, but it's relatively small. Got you. Okay, that helps. And then just revisiting the long term model that you guys have laid out and focusing on the gross margin line specifically, are you guys still comfortable with that 65% to 70% target? And maybe speak to the areas where you think you can get further efficiencies that you maybe fully haven't tapped into yet? Yes. So I definitely think we feel like we can continue to expand overall gross margin. And I think one of the key drivers that you typically see is the broader adoption of the HCM products certainly helps us. They typically they do require less implementation, it's more configuration, but they also typically have higher margins as well. And so I think that's certainly a driver that we would expect to be able to continue. In terms of how we view the long term model, we're committed to focus on 20% plus growth. I think we will update what that margin profile looks like over the longer term as we enter next fiscal year and adopt 606. So I think more to come on that, but we definitely see opportunities to continue to leverage G and A and to expand overall gross margin. Very helpful. Thanks for taking the question. Thank you. Our next question comes from the line of Shankar Subramanian with Bank of America Merrill Lynch. Your line is now open. Thank you. Congrats on a great quarter. Just a follow-up question on the Benefix acquisition. Does it necessarily allow you to address larger clients in the future? Meaning in fiscal 2019, should we kind of expect a mix shift away from this lower end of the market to maybe even into the higher end? Yes. So I think it's important to go back to our target market is 20 employees all the way up to 1,000. And there's times where we get clients a little smaller than that and larger than that as well. I don't think our target market has really changed at all. One of the things that we really liked about this acquisition is their solution and where they have focused on historically is very much similar sized customers as ours. So if you think of our average sized customer being in the 120 employee range, we think there's great overlap in terms of our target market. And I guess for that reason at this point in time, I wouldn't anticipate Benaflex driving any change to our mix. Got it. And then in terms of the product adoption of HCM just by modules, could you talk about how the compensation and survey is trending relative to your prior quarter? And then maybe give some qualitative assessment of the rest of the modules as well? Sure. So I think I've said this in the past, when we introduce a new module and build a new module, we certainly expect that module to be able to get to between 10% 20 percent of our customers over time. And the trajectory on those just depends on the module. But I think we feel pretty good about both compensation and surveys over a period of time getting into that range. I look back at our experience with the last two modules prior to that recruiting and expense, I would say recruiting has been a great driver for us. We've seen significant demand for recruiting. Expense has been probably right behind there, not quite as much demand as Got it. Thank you so much, Chris. I'm showing no further questions in queue at this time. I'd like to turn the call back to management for any closing remarks. Yes, I'd like to take this opportunity to just thank everybody for their interest in Paylocity and we're going to be on the road here at investor calls. So if any you want to have some time with us, make sure that you can get on our schedule. Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone have a great day.