Hello, and thank you for standing by. Welcome to Paylocity Holding Corporation Second Quarter 2024 Fiscal Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. I would now like to hand the conference over to Ryan Glenn. Sir, you may begin.

Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal 2024, which ended on December 31, 2023. I'm Ryan Glenn, Chief Financial Officer and joining me on the call today are Steve Beauchamp and Toby Williams, Co-CEOs of Paylocity. Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab. Before beginning, we must caution you that today's remarks including statements made during the question-and-answer session contain forward-looking statements. These statements are subject to numerous important factors, risks and uncertainties, which could cause actual results to differ from the results implied by these or other forward-looking statements. Also, these statements are based solely on the present information and are subject to risks and uncertainties that can cause actual results to differ materially from those projected in the forward-looking statements. For additional information, please refer to our filings with the Securities and Exchange Commission for the risk factors contained herein 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 and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measure to the directly comparable GAAP financial measure, because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort. In regard to our upcoming conference schedule, I'll be attending the Wolfe Conference in New York on February 27th, and Toby and I will be attending the Stifel Executive Summit in Florida in early March and the Raymond James Institutional Investors Conference in Orlando on March 6th. Please let me know if you'd like to schedule time with us at any of these events. With that, let me turn the call over to Steve.

Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal 2024 earnings call. Our solid results continued in Q2 of fiscal 2024, with total revenue growth of 20% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Recurring and other revenue was $298.4 million or 16% growth over Q2 of last year. We continue to receive positive client feedback on our modern product suite, including newer products such as advanced scheduling, learning management, rewards and recognition and employee voice. Specifically, a client in the automotive industry with over 1,000 employees highlighted how the ability to create custom recognition awards that are shareable via the mobile app is positively impacting employee sentiment by making it easier for employees to celebrate one another in new ways. Similarly, a retail client with 900 employees has created over 200 custom trainings with our learning management module to better connect employees to the company's vision, mission and core values. Additionally, we continue to invest and build upon our AI leadership in the HCM industry with the launch of AI-driven personalized learning plans, optimized workforce schedules and embedded generative AI recommendation within rewards and recognition, employee voice and community. Building upon the generative AI-driven announcement and job description released in community and recruiting last calendar year, these new features help to further improve business efficiency, communication and the end user experience for our clients. While we are pleased with our Q2 results, the macro environment has become increasingly challenging over the last few months as employment levels on the platform once again moderated versus our expectations and presented an incremental headwind to results in the quarter and to fiscal 2024 guidance. Despite the macro challenges, we continue to invest in our product suite and this commitment to product innovation continues to be recognized by third parties as Paylocity was recently awarded a Bronze Brandon Hall Group Excellence in Technology Award in the Best Advance in Employee Engagement Technology category, and named as overall leader in 10 HCM product categories in G2's Winter 2023 Grid Reports, marking the 21st consecutive quarter in which Paylocity achieved leader ranking. I would now like to pass the call to Toby to provide further color on the quarter.

Thanks, Steve. This is a very busy time of year for all of our teams across the business as they work closely with clients on year-end processing of payrolls, W-2s, 1095s and annual tax form filings to federal state and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy year-end season. Building on Steve's comments around product innovation, in early December, we announced the acquisition of Trace, which enables organizations to manage headcount plans, forecast headcount budgets and approved headcount changes. When combined with the valuable employee record data in our platform, we believe Trace's headcount planning capabilities will help our clients improve decision-making and drive faster execution. From a financial perspective, Trace will not materially contribute to revenue or impact our overall margin profile in fiscal 2024. With respect to our go-to-market efforts, we've realized significant success in the upper end of our target market over the last several fiscal years, and we have invested to grow the size of that team. To date, in fiscal 2024, we've seen sales cycles upmarket take longer, and it has taken longer for our new reps to ramp up which has pressured productivity and new sales volumes in January and has weighed on fiscal 2024 growth. That said, we remain confident in our sales team and go-to-market motion, and we are pleased by our top of funnel activity, the growth of the upmarket pipeline and our ability to drive product differentiation upmarket. We will be focusing the rest of this year and going into next year on driving a higher level of go-to-market productivity and driving execution upmarket. We have remained focused on our referral channels and have been pleased with the consistency of our referrals, which once again delivered more than 25% of our new business in Q2. We have also continued to drive leverage across the business as we grow and scale with focus on both EBITDA and free cash flow leverage this quarter and this fiscal year. The strong culture at Paylocity continues to be recognized externally as we recently were named to Newsweek's America's Greatest Workplaces for Diversity in 2024 and built-ins list of the 100 best large companies to work for in Chicago for 2023. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 2024 guidance.

Thanks, Toby. Total revenue for the second quarter was $326.4 million, an increase of 20%, with recurring and other revenues up 16% from the same period last year and above the midpoint of our guidance. Our adjusted gross profit was 72.7% for Q2 as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to invest in research and development, and to understand our overall investment in R&D, it is important to both combine what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 27% when compared to the second quarter of fiscal 2023 as we continue to build out the Paylocity platform to serve the needs of the modern workforce. In regards to our go-to-market activities. On a non-GAAP basis, sales and marketing expenses were 21.3% of revenue in the second quarter versus 23.7% in the second quarter of last year. On a non-GAAP basis, G&A costs were 9.1% of revenue in the second quarter versus 11.3% in the same period last year, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA for the second quarter was $112.6 million or 34.5% margin and exceeded the top end of our guidance by $9.6 million and represented 620 basis points of leverage versus Q2 of fiscal 2023. We continue to be pleased by our ability to drive increased profitability through leverage and adjusted gross margin, adjusted EBITDA, and free cash flow while also maintaining strong revenue growth. Briefly covering our GAAP results. For Q2, gross profit was $219 million. Operating income was $49.7 million and net income was $38.1 million. In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $366.9 million and no debt outstanding. In regard to client-held funds and interest income, our average daily balance of client funds was $2.4 billion in Q2. We are estimating the average daily balance will be approximately $2.9 billion in Q3 with an average annual yield of approximately 450 basis points. On a full-year basis, we are estimating the average daily balance will be approximately $2.5 billion to $2.6 billion with an average yield of approximately 445 to 450 basis points. Please note, our guidance includes the impact of a contemplated 25 basis point decline in the Fed funds rate in May. In regard to client workforce levels, year-over-year employees on the platform growth came in below our expectations in Q2, resulting in an incremental headwind to the quarter and fiscal year. Given recent macroeconomic trends, our updated guidance for the back half of fiscal 2024 includes further moderation in client workforce levels through the remainder of the fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal 2024. For the third quarter of fiscal 2024, total revenue is expected to be in the range of $395 million to $399 million or approximately 17% growth over third quarter fiscal 2023 total revenue. And adjusted EBITDA is expected to be in the range of $153.5 million to $156.5 million. And for fiscal year 2024, total revenue is expected to be in the range of $1.384 billion to $1.389 billion or approximately 18% growth over fiscal 2023. And adjusted EBITDA is expected to be in the range of $474 million to $478 million, which represents 240 basis points of leverage over fiscal 2023. We are now ready for questions.

Thank you. Our first question comes from the line of Scott Berg with Needham. Your line is open.

Hey guys. This is Josh on for Scott. Thanks for taking our questions. Just starting off here, what are you seeing in terms of unit growth or any potential churn with customers at the low end of the market? One of your public competitors noted an elevated level of churn with customers under 50 employees. Are you seeing anything there? Or is it really simply just a matter of customers across the board regardless of size, lowering their employment levels across all customer segments?

Yes. I think the impact that we're seeing is our current customers are not necessarily getting the growth of employees on the platform that you would typically see in this type of economic environment. And so we certainly factored that in, in terms of what we've seen already this year and then assumed that that was going to continue to be the case for the back half of the year. So that's the headwind that I think Ryan referred to in the script. You typically see customers under 50 employees, they naturally turn over at a higher rate just because there's more out of business losses. That trend is probably something that's always been the case in our industry. And so if you were growing that segment more and you were losing more there, that probably just is the nature of the business under 50 market. I don't think we've seen anything in that space that would be any different than before. And I think an economy that's growing and fairly consistent in terms of employment levels, nothing to call out in that space.

Got it. And then just a follow-up. Are you seeing – is there going to be any year-over-year headwinds related to forms revenue in the March quarter in terms of the number of employees that were active on the platform on a year-over-year basis? Thank you.

Sure. So I think we obviously – where we are in the quarter, have a good idea of where form revenue is trending for Q3, so we've taken that into account as we've guided for Q3 and for fiscal 2024.

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

Great. Thanks very much. Toby, can you spend a couple of minutes reviewing some of your commentary on the salesforce, the close rates, upmarket. How much of that you feel is economic versus execution? Thanks.

Yes. Sure. Thanks, Brad. Yes, I think if you go back over probably the last, call it, 18 months to two years, we've talked about getting traction upmarket and we've talked about having incremental success there from a sales perspective. And I think that's been the case. And I think we've also invested more across the business and in go-to-market to support the growth that we've seen there. And as we've called out, I think last quarter, we called out that we were seeing slightly slower sales cycles, and I think we saw the same thing this quarter. And I think that was the reason why we put it in the script. I think it's hard to take apart with any precision what part of that because I know others in the space have talked about this, too, and you've on and off heard it in the broader software category in terms of upmarket sales cycles being longer. It's hard to take apart how much of that is attributable to the macro. I don't think the macro helps. But I think part of it is, as we've sort of gotten further and further into the upmarket, I think we certainly have an opportunity to execute better. And I think that will be a focus as we look at the rest of this fiscal year to be able to drive productivity and I think that will carry into next fiscal, too.

I think the only thing I would add to that, Brad, is one of the things that we are seeing is a pretty nice build in the pipeline market. We didn't see all that come through in January and obviously, we had to factor that into the guidance. But we definitely see a fair amount of activity there. And so that is certainly allows us to remain optimistic about the success in the market in terms of the clients that we're selling, the response we're getting from prospects in the market and the opportunity going forward.

And can you just remind us what upmarket means for you? Is that north of 500, north of 1,000? Thanks.

Yes. I would say it's north of 500 employees would be how we define that kind of internally, yes.

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

Hi, good evening. Thanks for taking my questions. Maybe the first one, as you – maybe to piggyback on Brad's question about the upmarket, does it make you think that you need a different type of either sales reps? Or I guess, can you help us understand maybe what has made it more difficult for them to be able to ramp? And does it, do you need to hire different types of reps there than it historically done in the core sales organization? Maybe walk us through that?

Yes. I think it's a good question. So we've been ramping the number of reps in that space, as Toby just mentioned faster than the rest of our sales force over the last, call it, two to three years. We've called out the fact that success in that market has been a tailwind for us over the last couple of fiscal years. Early on in that cycle, you get a lot of promotions from within. It's very common to be able to do that as you start to ramp to bigger numbers; you're certainly bringing more people in from the outside. So I think part of this is figuring out how long does it take someone to ramp from the outside versus internal. And then I think secondly, when you start to get higher volume of deals in that space, trying to understand what those sales cycles look like and the decision-making cycle. So there certainly is a little bit of learning at scale that's going on here. But I would reiterate the fact that we've had a lot of success. It's been a tailwind for us over the last couple of years, a little bumpier here on the first half of this year, but the pipeline looks pretty rich and strong. And we think we know what we have to do to continue to get success in that market going forward.

Great. And maybe just a follow-up for Ryan. Just as I think about the guidance, how much of it was maybe the sluggishness that you've seen upmarket versus the trend in employment in the base coming in differently than expectations? And as I think about the exit rate and what that implies, is that kind of a fair way to think about the growth rate going forward, at least for the short-term?

Yes. I think when you think about the revised guidance for this fiscal year, I think it's absolutely a combination of what Steve and Toby have referenced relative to sales execution. So that's certainly part of it. And I think an equal part of it has been some of the challenges we've seen from a macro standpoint, both year-to-date as well as the fact that we factored in some further moderation in the back half of the year. So I think both of those contributed fairly equally to the revised guidance. Relative to what that implies for Q4, obviously, as I referenced, we had some further moderation in employment levels. That puts you in the sort of 13% or so range for exit of Q4, and I think we'll see how the back half of the year goes before we guide more specifically into 2025.

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

Great. Thanks very much. Steve and Toby, I'm wondering how deeply do you analyze the trend of the employees that are on the system? I mean do you break it out internally for yourselves by industry? Do you break it out by geo and you break it out by segment? And because UKG started disclosing that and they're private, so they can do it, right? But I assume you guys have that level of detail, too. And I'm just wondering, so where was the weakness?

So we do all of those things, and we look at it a variety of different ways. I would tell you that not – there wasn't a big spike in a specific geo or a specific vertical market. I think your higher hourly employee segments when you think of vertical markets, we saw a little bit higher decline in those segments if you think of vertical markets. Geos, there really wasn't much, a call out at all. And so it was generally kind of across the board just a little bit of weakness. But when you add that up across all the customers that we have and you factor that in, it starts to have an impact, especially when it's happened month after month this fiscal year.

And so this is a tough follow-up, I know, but – so this is two quarters in a row, you think it happens again?

We factored into our guidance that the trend that we've seen in the last two quarters would continue through the back half of the year.

Thank you. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Yes. Thanks for taking my questions. I had a question and a follow-up. Just kind of building on the last couple of questions. I think you guys are articulating that there might be some macro stuff here, but also execution stuff. Can you share a little bit more how you're thinking about with a couple of quarters left, what you can do on the execution side, whether it's org or leadership changes? And then the second question, maybe if I could just go ahead and ask it, and I can repeat it if you all forget is, have you all maybe over-indexed on the upmarket activity? Because there are lots of smaller employers under 500 employees. Is there any way – I know it's easier said than done, a bit of a pivot to that market? Or is that market just less active? Thank you.

So I think what I would say is I don't think we need any major structural changes. I think we've got the team in place. When we look at what we've got from a pipeline perspective and we look at all of our internal metrics, we feel pretty confident that the ability to execute sits in front of us, big market, great product in terms of receptivity. And so we feel pretty good about that. We have grown pretty fast to your second question, in upmarket. Maybe hindsight's 20/20, it's hard to say that's been a great tailwind for us over the last two or three fiscal years. So hard to actually say that wasn't successful. Did it create some bumps in the road maybe early on in this fiscal year, yes. But the product is being received really well in the marketplace. The pipeline is really, really strong. We've got a great group of people that we feel like have been productive and will continue to be productive, and we've got to focus on execution in terms of what's in front of us.

Got it. But just Steve, just a real quick kind of follow-up because one thing you did note is the pipeline. I mean, if these deals are closing, that they just stay in the pipeline. I'm just curious, do these folks though at some point just kind of slow down or just cut it off and then you have to kind of get in the new sales cycle with them into next year? Or could some of these larger deals actually play out in the next couple of quarters? I'm just trying to understand how some of these larger deals could potentially play out because this is a newer business for you. So maybe you don't have pattern recognition? Thank you.

Sure. No, it's a fair question. I think we've been in this space for a while, but really more of the last three fiscal years kind of in earnest where we've been expanding more significantly. And as I mentioned earlier, we've ramped the reps up more significantly over probably the last two years with more hires from outside of the industry. So we do continue to learn. I think you see many people in this space talk about a long-dated sales cycle. So I think there's a macro element to that. That's certainly the feedback that we hear from our reps, which is just taking a little bit longer to get the decisions. We look at both top of funnel pipeline as well as late-stage pipeline, and we see pretty strong activity all the way through. So that gives us confidence that we've got an opportunity to be able to push some of those deals through on the back half of the year and have a better back half than we did on the front half upmarket.

Thank you. Our next question comes from the line of Brian Peterson with Raymond James. Your line is open.

Hey. Thanks. Two quick ones for me. So given what you're seeing in terms of the sales cycles and the productivity ramping, does that change your plan on sales hiring, at least for fiscal year 2024 and how we're thinking about fiscal year 2025?

Yes. So I think we got this question last quarter in terms of how we think about adding per segment. And I think the last couple of times we would say it's much more even. So we're not adding more in the upper end of the market relative to our core marketplace. And so we've already kind of made that shift. I think there's an opportunity for us to be able to – we're focused on an absolute new ARR number versus a specific number of reps. And if we have an opportunity to press on productivity to be able to get there, we always go there first. That's always kind of our thought process. So we won't make that decision until we go into next fiscal year. But I would say we feel pretty good about the staffing level that we've got right now. We feel good about the initiatives that we have to drive productivity, and we'll give you more color as we kind of go into next fiscal year.

Sure. So in the prepared remarks, I went through and gave you average daily balance and yield assumptions. I think we did bake in a contemplated 25 basis point Fed funds cut in May. The impact of that to the fiscal year, obviously very – in the middle of the fourth quarter. So muted impact, but it's probably about $1 million or so impact to Q4, and that's factored in the guidance.

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

Hi, good afternoon, guys. Just want to follow-up. The same kind of line of questioning as some of the others, but maybe a slightly different way with regards to the employment trends that you're seeing, and thanks for narrowing it down to the hourly employees and some of the clients. The last couple of quarters, we were talking about employment trends kind of being flat year-over-year. Are you actually seeing them decline on a year-over-year basis now?

We're not seeing them decline yet year-over-year. They're still actually up a touch in the first half of the year, but we're certainly seeing softness on a sequential basis. So when we think about what we saw in the first quarter and called that out last quarter and what we've seen in October through December, we are seeing some of that sequential flatness. So they still are up in the first half. But I think if this trend continues, they will certainly turn negative in the back half of the fiscal year on a year-over-year basis.

And that's what you're expecting?

That is what we have factored into guidance, yes, based on the fact that we've now seen several months of the sequential trend down.

Thank you. Our next question comes from the line of Terry Tillman with Truist Securities. Your line is open.

Yes. Thanks for taking my questions. I had a question and a follow-up. Just kind of building on the last couple of questions. I think you guys are articulating that there might be some macro stuff here, but also execution stuff. Can you share a little bit more how you're thinking about with a couple of quarters left, what you can do on the execution side, whether it's org or leadership changes? And then the second question, maybe if I could just go ahead and ask it, and I can repeat it if you all forget is, have you all maybe over-indexed on the upmarket activity? Because there is lots of smaller employers under 500 employees. Is there any way – I know it's easier said than done, a bit of a pivot to that market? Or is that market just less active? Thank you.

So I think what I would say is I don't think we need any major structural changes. I think we've got the team in place. When we look at what we've got from a pipeline perspective and we look at all of our internal metrics, we feel pretty confident that the ability to execute sits in front of us, big market, great product in terms of receptivity. And so we feel pretty good about that. We have grown pretty fast to your second question, in upmarket. Maybe hindsight's 20/20, it's hard to say that's been a great tailwind for us over the last two or three fiscal years. So hard to actually say that wasn't successful. Did it create some bumps in the road maybe early on in this fiscal year, yes. But the product is being received really well in the marketplace. The pipeline is really, really strong. We've got a great group of people that we feel like have been productive and will continue to be productive, and we've got to focus on execution in terms of what's in front of us.

Thank you. Ladies and gentlemen, at this time, I would like to turn the call back over to management for closing remarks.

Well, thank you very much for all of your interest in Paylocity. And I just want to echo one of Toby's sentiments from the prepared remarks, thanking all of our employees for their efforts over a very busy year-end. Have a great evening, everyone.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.