Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal year 2020, which ended on March 31, 2020. 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 third quarter fiscal '20 earnings call. Before discussing our results, I want to first comment on the evolving situation around COVID-19. Our number one priority has been ensuring the safety and health of our employees while also providing world-class service to our more than 20,000 clients. I'm pleased to report that we successfully transitioned nearly all of our employees to work from home in mid-March, and all of our business functions remained fully operational with no disruption to our clients. We have also been heavily focused on serving our clients in this challenging time. Our teams quickly mobilized to digest the new legislation, including the CARES Act and the FFCRA legislation, add functionality to our systems to address these legislative changes in an automated fashion, and proactively communicate to clients and prospects the impacts of these changes.

Thanks, Steve. Total revenue for Q3 was $171.6 million, an increase of 22.9%, with recurring and other revenues up 25.3% 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 through the first nine months of this year, offsetting some of the headwinds from 5 interest rate cuts since July.

I was hoping you could talk about maybe the playbook from '08, '09 and what's different now? What you can use, what you can't use, anything along those lines?

Sure. So I think, obviously, this is a very different crisis affecting us in different ways. It's much more sudden than even what we saw in '08 and '09. And so I think one of the big challenges is our ability to be able to make sure that we can be there for our clients during heightened levels of activity and a lot of legislative changes. That's very different than '08 and '09. And just in terms of that level of activity, it's almost like a second year-end for our service teams in terms of the interactions with our clients. I think the second part of this is just the suddenness of what we're experiencing. As you look at the employment levels across the country as a whole, you understand that we've got a lot of employees on our platform and clients also affected that way. So directionally, you see that incorporated into our guidance that we're certainly forecasting lower employment levels seen in the unemployment numbers.

I got it. And then, maybe you could touch on -- I know you guys target the smaller employee space? How many would be at risk for potentially going out of business or at least taking a while before they recover?

Sure. So our target market has largely been, for most of our history, kind of 20 to 1,000 employees, where our average-sized customer is more than 100 employees. So we're not in that micro start-up, small business space. As a result, we have not seen a lot of our customers come to us and say, 'I'm shutting down.' They may temporarily suspend operations, and we'll have to wait to see as those states open up if they're able to continue to reopen. But at this point in time, we've not seen any impact to our losses.

On the same note for retention, do you guys count furlough? Are you charging for furloughed employees? Or how do you guys charge in terms of recognizing revenue?

Yes. So it does vary. It depends on the product bundles that we've got. We do change pricing over time and react to the marketplace. We bundle and package it to make it efficient and easy for our clients to buy. The way to think about revenue tied to the number of employees is very much in the same direction as employment. As you see unemployment rising, the number of employees that are going to be on our platform will decline, and then we'll get the revenue impact. As Toby covered in the prepared remarks, the biggest impact on our guidance is that bucket of reduced number of employees on our platform.

Just as a clarification, if they haven't been paid during that furlough period, does it depend on the product if you recognize revenue for that pay period?

Yes. It depends on how a client's going to handle that furlough. I would say that if you look at the workforce and the unemployment rate, as that increases, the number of employees on our platform is going to decline. You can kind of ignore whether they are furloughed or on leave status. The reality is that the number of employees on our platform has declined. We incorporated that into our guidance, and as employment and states start to open up, we should benefit from those employees coming back to work.

Okay, great. And then a quick follow-up: quantitatively, could you describe whether you are above or below 90% retention at the end of April? How do we think about the retention level today?

Yes. So we typically give you an annual retention rate of 92% plus, and we view that at the end of the year. Based on data from the last 12 months through April, it's still over 92%. So no change to that.

Looking at the correlation of job cuts with the employee per client, how you charge on payroll? What about the slowness to deploy? Can you quantify how that's impacting the model in Q4?

As we mentioned in the prepared remarks, April had fantastic bookings. The number of clients scheduled to go live was almost double what it was last April. Great bookings. We had those queued up in implementation. In any given month, some customers get busy with other projects and might say they want to wait another week or go next month. Normal course of business. I would say the rate of what we call pushes to a future date probably doubled in April. Not surprisingly, many of those have set launch dates for May or some might even have pushed to June as they understand the landscape around them. But we have not had customers say to us they are no longer interested in transferring to our platform. That has not happened at all.

What about just the legislative changes? Remember the ACA? There was a lot of complexity in furlough versus job cuts. How do you compare the situation now with ACA?

I think a couple of things we are seeing from our customers: they are really struggling to stay connected with their employees, communicate effectively, and keep everyone informed. Employees, obviously, are nervous and want more information. In April, we saw our usage of products like community almost double across our client base. There is definitely a need to not only digitize and automate manual processes but also to find different ways to engage with employees. We're also seeing significant increases in our survey product, where employers might be taking polls or asking for feedback from employees. This time of uncertainty has created a push for organizations to communicate more effectively. Some organizations that aren't impacted as much are still driving certain projects, and we're seeing increased activity in our learning management system. This becomes an opportunity to train employees to work from home effectively. I would highlight community, surveys, and learning management as products gaining momentum before and during COVID-19.

Can you talk about what kind of assumptions you're embedding in your guidance for the next quarter in terms of like employment levels?

Sure. We widened our guidance range because it's more difficult to predict this. We have a lot of data and look at it closely daily and weekly. We're monitoring how many people are on our platform that we can monetize and the trend rate. We also look at recruiting data for early indicators of hiring. We can also analyze time and labor to see how many people are punching in. We saw significant declines late in March and early in April but noticing it flatten out over the final weeks of April. We took these trend lines through the quarter to inform our guidance, anticipating slow recovery as states begin to reopen.

Can you talk about what you're doing regarding spending? Where are you cutting back, and where does it happen automatically?

If you look at our remarks, our clients are calling, e-mailing, and interacting with us more frequently than ever. It's vital to be there for them, and we have done a lot with product and service for that. There's no opportunity to cut there. In fact, there's a need for moderate hiring in that area. If you look at our sales and marketing team, they were performing excellently before COVID-19, with phenomenal bookings in April. There is no opportunity to cut there. We think it's essential to maintain talent there. Our investment in product has also helped in sales this past fiscal year and will help us going forward. For nonessential spending, we've cut things like travel budgets and conferences, and we've been more judicious with hiring. We wish to balance investing in areas where we get great ROI while managing costs carefully.

Can you talk about the level of investment that’s going into the broker channel? How has that changed?

The broker channel accounted for more than 25% of our new business revenue in the quarter and the last nine months. Even during these times, it remains a valuable way to reach customers. As companies struggle to communicate with their employees, there’s a strong push for automation and cost management, which resonates with brokers. Our sales and marketing teams continue to engage with brokers virtually and look for content to share. We've seen consistent activity with our brokers over the past month and a half.

With regards to vertical exposure, can you talk about areas you're exposed to? How much exposure might you have to areas like restaurants, hospitality, and smaller retailers?

There's no real concentration. It's horizontally focused in terms of who we serve. If you look at the percentage of U.S. small- to medium-sized businesses in hospitality, you'd find a similar percentage among our clients. There really isn't any significant concentration to speak of. Our historical roots are in the Chicagoland area, so there may be a larger number of customers in Illinois versus other states, but it follows population trends after that.

Can you remind us what percentage of the small business environment is typically restaurants and hospitality related?

It depends on your exact definition of hospitality, but if you consider restaurants as a key component, it's less than 10%.

How direct is the relationship between employment and revenue? Assuming you have a subscription base fee, if we see a 10% reduction in the number of employees, how does that translate to revenue?

Our average-sized customer has slightly more than 100 employees. We do have base fees included in some of our products, so smaller clients don't have the exact one-to-one ratio. But broadly across the customer base, it's still very close to that one-to-one ratio. There is a somewhat muted impact, but it doesn't take you from a one-to-one ratio to 0.7 to one or anything significant like that.

What are your expectations regarding companies that have slowed down? When do you think those companies may bring employees back?

It's very different by geography and based on state orders for reopening. For instance, we've seen some level of activity with takeout in restaurants. As states open, you'll see a tick up in activity. We are just starting this process. It’s tough to predict how it will unfold. Heavy cuts occurred from late March into the first few weeks of April, but we saw stability in the last two weeks of April. That’s probably the best indicator we have right now, and we will track it day by day and week by week for the rest of the quarter. I would like to take the last moment to once again echo my earlier sentiments and thank all of our employees for the great work over this past quarter, especially during the COVID-19 crisis, and also thank all of our customers who have been diligent in finding the best way forward. Thank you very much for your interest and stay safe.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may all disconnect. Everyone, have a wonderful day.