Good afternoon and welcome to Paylocity’s Earnings Results Call for the Second Quarter of Fiscal Year 2020 which ended on December 31, 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.

Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal 2020 earnings call. Our strong and consistent revenue growth continued in the second quarter led by recurring and other revenue growth of 24.6%. We had another very strong sales quarter throughout our target market and we're pleased to be able to raise fiscal 2020 total revenue guidance by $5 million despite the headwind of three interest rate cuts since July. We continue to invest in sales and marketing initiatives to drive growth, and through the first half of the fiscal year our sales team is off to their best start in quite some time. Similar to last year, we continue to see unit strength coming from clients with under 50 employees as well as healthy momentum in the core and upper end of our market.

Thanks, Steve. Total revenue for Q2 was $132.4 million, an increase of 23.4% with recurring and other revenues up 24.6% from the same period last year. As Steve noted, our sales team had another strong quarter and we're pleased with the consistency of our performance, specifically the growth we're seeing in recurring and other revenues in both Q1 and Q2, offsetting some of the headwind of three interest rate cuts since July. Our adjusted gross profit was 70.3% for Q2, an increase of 50 basis points from the same period in the prior year as we continue to focus on driving scale in our business model, while also adding operational resources to handle the increased client volume resulting from a strong start by our sales force in fiscal 2020. We continue to make significant investments in research and development, and to understand our overall investment in R&D it is important to combine both what we expense and what we capitalize. On a combined non-GAAP basis, total R&D investments were 14.4% of revenue in Q2 and on a dollar basis our year-over-year investment in total R&D increased by 20.9%. On a non-GAAP basis, sales and marketing expenses were 25.6% of revenue in Q2, reflecting the strength of the sales performance in the first half of fiscal 2020. On a non-GAAP basis, G&A costs were 14.9% of revenue in Q2 versus 15.7% in Q2 of last fiscal year, an 80 basis point improvement, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Adjusted EBITDA for the second quarter was $30.3 million or 22.9% margin as compared to our guidance of $30 million to $31 million. While we are pleased to deliver in the range and continue to focus on driving leverage, we did see margin headwind in the quarter from the lower interest rate environment and from higher sales expenses associated with our strong sales performance. Covering our GAAP results. For the quarter, gross profit was $87 million, operating income was $6.1 million and net income was $5.5 million. In regard to the balance sheet, we ended the quarter with cash, cash equivalents, and invested corporate cash of $152.4 million, and we generated $27.8 million in cash from operating activities in Q2 as compared to $27 million for the same period last year. Finally, I'd like to provide our financial guidance for Q3 and updated guidance for fiscal 2020. For the third quarter of fiscal 2020, total revenue is expected to be in the range of $168.5 million to $169.5 million or approximately 21% growth over third quarter fiscal 2019 total revenue. And adjusted EBITDA is expected to be in the range of $63.8 million to $64.8 million; and for full fiscal year 2020, total revenue is expected to be in the range of $572.5 million to $573.5 million or approximately 23% growth over fiscal 2019 total revenue, and adjusted EBITDA is expected to be in the range of $163.5 million to $165.5 million.

Hi, Steve, Toby. Congrats on a good quarter and thanks for taking my questions. I guess Steve let's – yeah, let's just expand upon some of the sales successes that you said in the quarter. You said your sales teams were off to the best start ever, it sounds like your move down market is having some fruition. Do you see any changes in the environment, and I guess in terms of demand trends, what customers are asking for, maybe modules or is it just kind of strong productivity across your sales force today.

Yeah so, I think overall you know a lot of the enhancements that we’ve made to the product over the last several years including new modules and feature ads, we definitely are seeing great reception in the market for those additions I mentioned Community in the prepared remarks as you know a highlight for us in terms of both differentiation and utilization. And I think the other thing I would say is the strength in the sales force in the first six months of the year really is across the board. So continued strength in units below the 50 employee mark. Our core mid-market offering has done really well, and at the top end of our target market we've done well, and so when you put all that together, it's definitely the best start we've had in a number of years.

Great, helpful. And then Toby, on the margin guidance for the year, you raised revenue. You kept your EBITDA, adjusted EBITDA on an absolute basis flat though from your prior guidance. How should we think about that delta or are you spending in a couple of areas or maybe being conservative around interest rate changes.

Yes it's probably a little bit of both Scott, and I think we're definitely seeing it from a sales expense standpoint which is a result of the sale performance that Steve was just talking about, which I think we're you know we're really happy with. And then obviously we've had the headwind from the three rate cuts since July which has had an impact both from a revenue standpoint, but also from an adjusted EBITDA perspective, so I think those are the two main points.

Yeah. It's all I have at the moment. I'll jump back into the queue. Thanks.

Thanks.

Thank you. Our next question comes from Terry Tillman with SunTrust. Your line is open.

Hey, how are you guys. It’s actually Nick on for Terry. Thanks for taking our questions. So first one was around R&D, so I guess how should we think about R&D investment moving forward? Should we expect further increases in PEPY? In the near term, are you focusing more on the current products? Thanks.

Yeah. So, I think we have opportunities to both. So we're definitely seeing increased penetration of a number of modules that we've released over the last several years, and that certainly helps us from a realized PEPY that we're getting across our clients. At the same time we've got an inside sales team really selling those products back to current clients, so we're getting a little bit of a lift there. It is not a huge part of our new business revenue, but it gets bigger and bigger every single year. And then lastly, we do think that we will continue to be able to add modules over time that we're going to be able to monetize. And so, the ability for us to continue to drive new product innovation both from a feature set and new modules is definitely part of our long-term plan, and we believe that the range for R&D when you expense and capitalize is really 10% to 15%. We've been solidly in that range for a number of years, and I think we would continue to look at that same type of investment on a go-forward basis.

Got it. Okay. That's helpful. And then just a follow up, so I guess any updates on -- and you touched on Community in the prepared remarks, but on I guess attach rates or usage across the customer base for Community or data insights. I know you mentioned around 50% of customers are using data insights at the user conference. I guess just any update you have there would be helpful. Thanks.

Yeah. So we definitely are seeing increased overall client utilization in our data insights module, which comes with any purchase. So, it's not a separate purchase and we have been driving new and different analytics for those customers to be able to benefit from that. We've got a utilization dashboard that customers can use and see exactly what employees are doing and how that translates to both savings the clients' time in driving higher levels of engagement is probably the newest analytics that we've added to the platform. And then, Community we’ve rolled out – we completed the rollout in the fall.

Got it. Okay. Thank you.

Thank you. Our next question comes from Pat Walraven with JMP Securities. Your line is open.

Oh, great. Thank you and congratulations to you guys.

Thanks.

I want to talk a little bit about how big this business can get and you have some slides in your deck that are really helpful a lot but I’m going to drill down just a little bit. So you got 20,000 customers roughly, right Steve…

Yeah.

...and there's 600,000 in your target market.

That’s correct.

But you’ve taken off 600,000 right. I mean how – so how many of those are really up for grabs. Is this something where you can – what sort of market share can you eventually end up with?

Sure. So I think a couple of things this 600,000 are core market of 20 to 1,000 employees. As you said at the end of last fiscal year we had a little more than 20,000. And I think our viewpoint is we're trying to continue to grow the business at above 20% per year increasingly so that’s coming from units as we saw last year which was over 20%. And so the idea of every – between three and four years at that metric you can end up doubling the business. And so if you think of that and 20,000 clients being 60,000 clients there’s still just 10% market share. And so we look at that as you know within a reasonable timeframe and you look at kind of our long-term model that that's something that we're kind of executing toward based off last year's metrics and we're going to kind of stay focused on that and we think there's room beyond that but that's a great near-term target. Let's think of doubling the business and getting to a billion dollars and beyond is our next big milestone.

All right. Awesome. Thank you. And then just a sort of a follow-up on that is you also have a great slide on the competitive landscape but one that sort of came across my radar recently and I don't see on here do you run into Paycor? Is that a competitor?

Yeah I think we would characterize Paycor as you know being one of the largest privately held companies that we see. So a lot of the privately held companies are smaller companies you know operate in a very narrow geography you know and I think Paycor would definitely be much larger than that. And so we would kind of put that still you know at this point in time that local or regional and that's not saying anything about Paycor they're a tough competitor we see them fairly often but not enough to necessarily call us specifically.

Okay. Perfect. Thank you very much and congratulations.

Thank you. Our next question comes from Brad Reback with Stifel. Your line is open

Great thanks very much Steve. If you think forward given the amount of engagement that you're seeing with the community product does that fundamentally change the type of solutions you can put into your customer base going forward. Thanks.

Sure. So one of the ways that we think about it is we're really trying to add value in three different ways for our customers and one is we're really trying to save them time and really digitize the entire HR back office. And so that does create a lot of interactions and a lot of transactions and it drives a lot of utilization on our platform. So we look at daily users and weekly users and monthly users and we see that increasing based of a transaction weekly users and monthly users and we see that increasing based off the transactions. Secondly, we're trying to do is find more engaging use cases that are just automation of transactions. So you think about our survey product, you think about performance management and journal capability, reward and recognition with impressions and community which creates a whole other level of engagement and we take all of that data from both these engagement oriented products and transactional products and then we combine that to deliver interesting insights back to our clients and we do think that that data that we have about the employee and the frequency of which they engage certainly opens up interesting product opportunities on a go forward basis that likely surround that workforce but that might be a little bit different than what we would have thought of maybe three or four years ago.

Thank you. Our next question comes from Mark Marcon with Baird. Your line is open.

Good afternoon, Steve, Toby and Ryan. Wondering what are the implications of the strong G2 scores particularly in the up market. Does that represent a new opportunity? You're clearly doing really well from that perspective so just wondering what the plans are to capitalize from that.

Yeah. I think we're really proud of the G2 scores overall and I think it reflects our focus on a strong client experience that we're ultimately delivering. We've been consistently delivering over 92% revenue retention as a proof point. And I think mobilizing our customers that advocate has been really, really positive for us. I'm not so sure that I would look at the first time winning the enterprise is unlocking some brand new potential, I think it probably speaks to the success that we've actually having in that market. I think it's important to mention that the strength in the sales force has really come across all segments and you know that 500 plus 500 to 1,000 and sometimes it goes a little beyond 1,000 has been a really strong start to us and I think it's just another proof point.

That's great. And then Toby with regards to the guidance…

Yeah.

...how were you thinking about flow balance growth and effective yield and how that compares and contrasts relative to last year?

Yeah. So I mean obviously we’ve seen – we have seen three rate cuts since July and that's certainly a headwind as I said both from revenue and from adjusted EBITDA perspective as that flows through. And I think there is – there will be continued flow through – within the impacts in Q1, Q2, there will be continued flow through in Q3 and Q4. And so, I mean, I think directionally you'll see that come through even though we have average balances are up from around 1.1% to 1.3% in Q2 you'll continue to see that that impact flow through into Q3 and Q4.

Okay, great. And then with regards to the deferred contract cost on the free cash flow, how should we think about that as the year unfold?

So I think what you're – what you see there is some of the proof point of the sales force execution that Steve was talking about. So we have seen strength in Q1 and Q2 and if you look at Q1 and Q2 performance of this year versus prior years, I mean, that's one of the areas where you start to see – start to see the impact of that.

Yeah, clearly.

I think it's – it references the strength of the sales performance in the first half so far and in Q2.

Yeah, it's been great. Terrific I’ll follow up offline. Thank you.

Yeah.

Thank you. Our next question comes from Samad Samana with Jefferies. Your line is open.

Hi. Thanks for taking my questions. So maybe first I just wanted to Toby on the sales and marketing side just for clarity that's driven by more commissions because sales were stronger than expected. Any change on the customer acquisition cost side if we just kind of held it like-for-like in similar sized deals?

No. I mean I think what you're seeing in the sales marketing cost so take a step back we've talked about incremental investments in sales and marketing over the course of call it the last year or so and so I think you're just seeing some incremental investment there. But I think you're also seeing the other significant part of it is the incremental sales expense from the sales performance in the course of the year and in the quarter.

Yeah. And I think just add to that if you compare that line item to last year at this time, we would say the incremental percentage spend is largely driven by sales performance, staffing levels in the sales organization directly related to our producers. The marketing initiatives we think are relatively small. We're excited about some of the things that we're doing channels and marketing, but most of that is really coming from our sales organization performance.

Okay. Great. And maybe one for you Steve. As you think about competitive dynamics, any change in pricing behavior or discounting behavior, some of your larger competitors have not had such great quarters. I'm just curious if you're seeing any change in behavior prices in the number one factor but it certainly is something that we get asked about.

Yeah. Yeah. So I definitely don't think price is the number one factor but you're right, it's a competitive market and we're used to a highly competitive market and we really have not seen any changes to those dynamics. At the end of the day, it's really the strength of our product and the service offering that we can provide those customers to kind of unlock the value that we're giving them is really probably more important than price and we haven't seen any abnormal behavior from a pricing perspective.

Great. Appreciate you taking my questions. Thanks, guys.

Yes. Thanks.

Our next question comes from Brian Peterson with Raymond James. Your line is open.

Thanks, this is Alex Brown in for Brian. Steve I just want to follow up on the sales momentum comments. Can you just elaborate on what metrics that might be on it. Is it simply just new customer growth or are you also seeing momentum on larger initial deal sizes or upsell as well?

Yeah, so I think if you look at you know new business revenue is how the sales organization is compensated, so new angle recurring revenue is really where we're talking about seeing that strength. And last year, we saw a lot of strength in units under 50 and so I would say that has continued into this year and we've seen even better strength in our mid and upper end of our marketplace. And so, if I were to characterize you know last year versus this year, last year we had a good year from a sales perspective it's been even better in that mid-market and upper end with continued strength at down market.

Got it. Thanks. And Toby I know it's come up on some prior calls but I just wanted to ask about the higher percentage of cash being used for corporate investments this quarter, is the cost of the commentary in the prior calls is more so tied to a higher percentage of client funds being invested, so I just wanted to ask about that?

Yes so we do both, we have a portion of funds out for clients that we’re investing and we also have a portion of corporate cash that we're investing as well and similar from a portfolio standpoint but we're investing a piece of each and I think that just you know on the corporate cash piece you know just sort of reflects nothing more or less than responsible placement of cash from the balance sheet. So…

Thank you. Our next question comes from Nandan Amladi with Guggenheim Partners. Your line is open.

Thank you. Good afternoon. Thanks for taking my question. A competitive question here. The traditional service bureaus have also reported improving retention rates over the last couple of quarters despite having some pricing actions as well. I'm wondering how much of a function this is of a healthy economic backdrop overall relative to any competitive sort of displacements and things like that, what are you seeing from your vantage point?

Yeah. So I think the way we see the economy manifest in our client base is how many employees are being paid and how many active employees that they have. And I would say we haven't seen any change to what that run rate looks like, so that has been kind of a slow growth environment for a while and that continues to look that way. So I don't think that's necessarily a factor for us because it hasn't changed. And secondly we don't sell a whole bunch of new businesses so that's not a key part of what we do. It sometimes you see with the economy increasing more new business formation. So I don't think the economy in itself has been really helpful or hurtful to us. The biggest impacts really just been the interest rate declines and then of course our own performance in terms of driving that acceleration that you see in recurring revenue these first two quarters of this fiscal year versus the last two quarters of last fiscal year.

Right. And a quick follow up on the operational side. I know you talked about adoption tools for customers to begin to adopt some of your newer features. How about on the onboarding side, how automated is that process and how much opportunity is there for you to make that perhaps more efficient?

Yeah. So onboarding’s been a great product for us. We've had in the market now for a number of years and we've got a significant portion of our customers that are completely digitized the onboarding process using our platform. So you could imagine that prior to starting the first job you'll go online, you'll fill out all the information, feel like you're required you know federal and state forms and you can include some content in there some welcoming content from the company and then be able to show up to work and not necessarily have to go through whatever a couple of two or three hours of paperwork like you normally would. And so that's been a really great product for us. It's one of those products that we've even seen get adopted at the lower end of our market more than we would have expected. So we feel good about it.

Thank you. Our next question comes from Matt Pfau with William Blair. Your line is open.

Hey, guys. Thanks for taking my questions. I wanted to ask on the sub-50 employee market, how is the effort to build out or partner with additional businesses in that area to help you generate customer leads progress in? And then also as you put some more focus on the sub-50 market, have you seen any competitive response from companies that war more of their target market?

Sure. So I think on the first part if you look at our channel strategy which is more than 25% of our new business revenue comes from brokers. Brokers do refer us fairly frequently under 50%. So it's not a new market for us is one that we're seeing opportunity and we're expanding into. We are creating more relationships with CPAs who are operating and I think we believe that that does take a while to be able to get a client referral so that you do a great job and get another referral and build that relationship over time. And we are gradually doing that and I think you see that in the unit success that we were able to drive last year at over 20%. So we're really happy with the progress that we're making. We think it's really more about expanding our channel approach than some sort of new brand new channel approach to be able to continue to succeed in that under 50 market.

And then on the competitive side, any response from some of the companies or their target market as you've had more success there?

Yeah. Again it's not a new market for us so I think that's an important point. We've always competed in that 20 to 50 maybe we see more deals in the 10 to 20 than we ever had before as we've kind of accelerated the unit growth down market. But I think it's really mostly for us the usual competitors that we've always seen, you might just see them a little bit more as we drive more activity there but nothing new.

Great. That’s all I had, guys. Thanks a lot.

Thank you. Our next question comes from Siti Panigrahi from Mizuho. Your line is open.

Thanks for taking my question. Just a follow up in Arvind’s question, you guys mentioned about ADP and Paychex, you've had almost 50% of our new clients. And besides the improvement in the returns and they talked about things strength on the 52,000 in that segment they talked about that recently and also they talked about the new platform lithium as well. I'm wondering are you seeing any kind of changes or are they expecting any kind of changes in competitive landscape as they get more aggressive and come up with a new platform?

Sure. So as – I go back to the prepared remarks this has really been the last few quarters have been the best comfort – two sales quarters that we've had in a number of years. And we continue to have success against what we think is all of our competitors and just by the fact that ADP and Paychex are the larger ones in the space and we run into them more frequently and so we continue with that same level of success. We haven't seen any differences from a competitive landscape we really feel good about the win rate that we're driving and the sales momentum that we have. So I'm not sure that a small change in retention from some of those big players really affects the size of our opportunity. Go back to 10% market share as 60,000 clients, we've got a lot of room before we even get there. So we feel really good about the start we've had.

And then when you think about growth, you know you talked about some of the modules getting traction. So how do you see the growth coming from you know, increasing the employee within your installed base versus cross-selling new products into the base – installed base and versus new logos?

Sure. So first of all new logos has always been the biggest driver of our growth. And last year, you saw new logos accelerate to about 20% for kind of the first time in a number of years. And we continue to have momentum in that under 50 marketplace, so that's probably the right way to think about that. I think in terms of add on sales it's something that we're growing faster than maybe our sales force but it's still relatively small when you look at the total amount of new business revenue. We do think that that's a great opportunity on a go forward basis and the fact that our clients are asking for these products and adopting them is a great sign that we're going to be able to continue to do that. And I think the last part of your question was clients adding employees, that's a really small part of our growth rate. So very, very low single digit percentages in a slow growth economy and that's been fairly consistent over the last number of years.

Okay. And then last question you talked about – Steve you talked about on-demand pay pretty early, you know, you shared some feedback, I'm wondering if you have any update on that on-demand pay and when are you going to allow it?

So we've had on-demand pay in the market. We – we rolled it out to two customers starting in the fall. We made it available to all of our customers as of January 1st and we definitely have had a number of those customers adopt it. I think we've always said about On-Demand pay as it’s a great option for an employee who might get stuck with unexpected expenses and need to be able to get paid that they've already earned you know available to them. But at the end of the day we haven't seen customers adopt it as quickly. We've seen customers sometimes feel a little bit hesitant and kind of want to understand what are the controls that they're going to have in place which we have a number of. And so I would say it kind of rolled out slowly to our customers although any of our 20,000 plus customers could turn that on today and offer that to their employees.

Right. Thank you.

Thank you. Our next question comes from Daniel Jester with Citi. Your line is open.

Yeah thanks for taking my question. I just wanted to go back to free cash flow question a little while ago and sort of year to date you know free cash generation is maybe flattish to down compared to the same period last year. You talked about the deferred contract costs but as we go throughout the rest of 2020 is there any other kind of puts and takes to be thinking about in terms of how EBITDA gets converted to cash.

Yeah I mean I think we've talked about from a measurement of free cash flow perspective is looking at that on an annual basis and continue to drive free cash flow leverage maybe think back to where we were just being we went from basically 12.9 to 16.3 over the last - Prior fiscal year and I think we've said we would focus was on being able to drive continued free cash flow progress on an annual basis. We're into the range that we've called out so I think we feel pretty good about that. And I think we remain focused on being able to drive continued free cash flow leverage on an annual basis. I think you see some timing elements sort of quarter to quarter within the year but I think if you look at it on an annual basis that's still how we think about it.

Got you. That's helpful. And then just on on-demand pay you just commented maybe some of your customers are taking a look at it. I mean what specific – can you give any specific examples of some of the reasons why they may not be as fast to adopt or maybe some of the pushback that they’ve given you more explicitly? Thank you.

Sure. I think it comes down to some of the controls that they have in place in terms of their internal processes. So it's definitely something that you see more demand for hourly workers. And if you think about it, I need to make sure that that supervisor has approved the hours that have worked and I need to feel confident before I advance them that pay that that pay was actually earned. A lot of the business processes that clients have are to do that on a weekly basis or on a biweekly basis depending on their payroll frequency and that's where they have those double checks. They don't necessarily do that every single day and that's what they need to think about it. They need to make sure that if that person is asking for an advance that, yes, they were there that day prior and my processes are verified so that a supervisor understands that and signs off of it. And so I think there's this need for hourly workers and demand for hourly workers that does require a customer feeling comfortable that they have the right processes to make that available.

Thank you.

Thank you. Our next question comes from Drew Kootman with Cantor Fitzgerald. Your line is open.

Hi thanks for taking my question. Just one for me and I wanted to follow up also on on-demand pay. So I know the hesitancy from some customers but just curious what the reaction has been from the people that are using it.

Yeah.

And any idea on that 10% to 20% penetration, how long that might take and any impact or revenue or any timeframe that you think there could be?

Sure. So I think overall when we introduce a new modular product, we think about that is you know could be a two or three year timeframe before you get into that 10% or 20% kind of range. Some products have definitely gone faster than that, a number of products have definitely gone faster than that. I think on demand pay you know is off to a good start. I don't think that you know we would – I think that this is going to have any immediate impact short run, there's relatively small fee structure associated with it, you need a whole bunch of volume for it to be material. It's a nice add on and great feature to have for – to differentiate us in the marketplace, but I wouldn't think that it's going to be material in the near term. We believe it's going to take a while for customers to be able to drive that adoption and it's going to be a little bit more of a slower rollout. From an employee perspective those that have used it and by the way we offer it to all of our employees as well, we've had great feedback overall. And so you think about the holiday season and depending on when your paycheck falls, I need to be able to do some gift giving, I need some extra cash, you feel like a scenario where somebody runs into some sort of you know un-forecasted expense and they need you know new tires for their car or something like that. We've heard different examples where they're really kind of advancing themselves and what it does is it takes the employer out of the conversation to say, hey can you advance me my pay, they can go on the app, they can see exactly what they've earned in real time and immediately request that it gets deposited in their bank account. So I think the employee experience that we've delivered has gotten great feedback. I think it's just going to take a little bit of time for customers to roll that out and from a revenue perspective therefore we'll have a fairly minimal impact as we look at the balance of this discrete fiscal year.

Perfect. Thank you.

Thank you. Our next question comes from Robert Simmons with RBC Capital Markets. Your line is open.

Hi. Thanks for taking our question. So following up on these questions I'm sorry for this new question on the topic but can you talk about On Demand Pay and how your offering and approach are differentiated versus what others provide?

Sure. So the way it works from an employee perspective is you log on to your mobile app which we have significant mobile app utilization so employees are used to going on there to do a whole bunch of things. They can look at their pay, they can actually look at how much of that their pay for the next payroll has been earned. So you can see it in real time oh so far I've earned $475. You can actually see it from gross to net with all the taxes and all your deductions taken out. I mean you can request whatever amount is available for you to request and there's some settings that a customer can put into it to manage that. And then the direct – it will be direct deposit into your account either same day depending on the time of day or next day and that's as easy as it is to use.

And then what is the revenue model actually for you, is it based on fees or what else.

Yeah. So the client selects whether they want to offer that as a benefit to their employees and pay a small kind of transactional fee or that they want to have that employee pay that small transactional fee up to the customer.

Thank you. Our next question comes from Arvind Ramnani with KeyBanc. Your line is open.

Hey. Yeah. Thanks for taking my question. Sir my first question is based on my checks with your core market, certainly feedback on the product among users as well as prospective clients is very positive. Win rates seemed to also be very good. But can you talk a little bit about kind of win rates with logic lines and in particular if one of your clients gets acquired by a larger employer, how do you all – how you all win rate in those types of situations?

Sure. So I think one of the things that I had said a couple of times is we've definitely seen strength across the entire market. So you know we would think about that as you know below 50, 50 to 500 and then 500 plus and so that 500 to a 1,000 is really the space at the upper end and again sometimes those customers are even a little bit larger there. I would tell you that we feel really good about our retention rates in that space. So the strength of our product as clients’ needs change over time. And then secondly that's been a big piece of the sale story for the first part of the year. So we've had strength in both our core market as well as that 500 plus and so we definitely feel really good about the win rate and their part of that contribution to a strong start to the year.

Great. And then, I also think, you know, your tone on – on this call as well as kind of underlying growth rates all seem to be – be very positive. Are there any areas of sort of concern or you know I mean I understand you have some higher costs but that's certainly offset by highest sales performance and all of that, but like you know is there any real area of softness or weakness, you're focused on?

No I mean I think the challenge for us this year is – is you've got three interest rate cuts, as wind in our face. You know the last couple of years we've kind of had wind behind our backs and so I think that puts more pressure on adjusted EBITDA than any other line item and then you overlay you know a great start to the year and strong sales performance, you know so you see us – we feel pretty good that we’re able to be in our EBITDA range that we're able to maintain that guidance for the year absorb those rate cuts for the year and then be able to also handle the expense associated with the strong sale start. And so that's really what we're trying to manage through the back half of the year, but I would always say those are the kind of problems that I'd like to have.

Great. And just last question for me, I'm – and I feel I should also ask a question on this On Demand compensation and we have talked about offline on the one topic I want to get clarification is the IRS rules around On Demand Pay is that clear because I know until a few months back, there was lack of clarity on the tax implications.

Sure. I think any time there's change in the way people are working whether it's the impact of the big economy in the number of 1099 workers and your legislation that you've seen in California around that or On Demand Pay in the idea of getting an advance On My Pay, there's going to be catch up from a legislation perspective. We haven't seen a lot of clarity as of yet. What we're really doing is offering people pay that they've earned and we're providing them in advance ahead of their regularly scheduled payday before they get there. And so we definitely believe our product gives him a compliant offering based off the current structure but we monitor that closely and we feel that if there are changes to it we can easily adapt.

Great. Thank you very much and good luck for the rest of the year.

Thank you. Our next question comes from Jeff with Craig-Hallum. Your line is open.

Thanks guys. One brief one here. I just wanted to touch, maybe if you just touch back on EvoShare and Compeat relationships, how those have come out of the gate relative to expectations and any implications for one to be more or less aggressive with other similar relationships down the road?

Yeah. We talked about it on last call that we really traditionally focused on brokers and financial advisers and generating that 25% plus of our revenue from that channel. And EvoShare partnership which we've been really happy with the start is really tied at the financial advisors and really helped provide the financial advisers differentiation and really integrates our product offerings. The Compeat is definitely something a little bit newer for us and that's really kind of a software partnership where you might have either vertical market software or kind of horizontal software offerings that we would then create a much more integrated offering for our mutual customers and then be able to jointly market that. And so we've been really happy with that one as well. Now none of those are really that material. I think it’s more about the concept and the idea that we could create more of these over time and that that would be a component of how we drive channels to continue to beat that 25% plus of our revenue.

Thank you. And I'm showing no further questions in the queue. I'd like to turn the call back to Steve Beauchamp for closing remarks.

Great. Well. I just want to take a brief moment to once again thank all of our employees during the busiest time of the year and then of course thank everybody on the call for your interest in Paylocity. Have a great night.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Everyone have a great day.