Paylocity Holding Corporation

Good day, and thank you for standing by. Welcome to the PayLossity Q4 2022 earnings conference call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to your speaker, Ryan Glenn, Chief Financial Officer. You may begin.

Good afternoon, and welcome to Paylocity's earnings results call for the fourth quarter and fiscal 22, which ended on June 30th, 2022. 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 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 and filed with the Securities and Exchange Commission. Please note that we are unable to reconcile any forward-looking non-GAAP financial measures to the directly comparable GAAP financial measures 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 will be attending the Wolf Research TMT Conference in San Francisco on September 8th, the Stiefel Executive Summit in New Jersey on September 12th, and the Piper Sandler Tech Conference in Nashville on September 14th. Please let me know if you'd like to schedule time 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 fourth quarter and fiscal 22 earnings call. Our sales team continued its strong execution in the fourth quarter with total revenue growth of 36.7%, marking our fourth straight quarter with more than 30% revenue growth as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. For fiscal 22, total revenue was 852.7 million or 34.1% growth, our largest annual revenue growth since fiscal 16. Our strong sales execution was driven both by adding new clients and increasing our average revenue per client. We ended fiscal 22 with 33,300 clients compared to 28,750 at the end of last fiscal year, an increase of 16%. The 16% increase in clients in fiscal 22 was also aided by very high client satisfaction as revenue retention once again remained greater than 92% and at its highest level in a number of years. Average recurring revenue per client was over 25,000 in fiscal 22 compared to just under 22,000 in fiscal 21, an increase of 16% as a result of increased employees on the platform and rising product attach rates across our client base. We continue to attach more product at time of sale and have realized increased success selling back into existing clients as our products focus on the most modern workforce resonate across our entire client base. Additionally, community usage continues to increase with the total number of monthly users growing more than 40% in fiscal 22, while video creation is increased by over 80% during the same period. These increasing levels of engagement are driving tangible business impacts for our clients. with our proprietary modern workforce index showing that higher engagement scores correlate with 15% lower turnover and faster headcount growth. Our commitment to product development continues to be recognized in the market, with Paylocity ranking high on the G2 crowd summer grid reports during fiscal 22, while Community, our social collaboration hub, was recently named the best culture-building solution within the employee experience category of the 2022 HR Tech Awards. Our strong culture, industry-leading software, and exceptional sales and operational execution would not be possible without the dedication and commitment of our employees. As we close out a very strong fiscal 22, I'd like to thank all of our employees for a fantastic year. I would now like to pass the call to Toby to provide further color on the quarter and fiscal 22.

Thanks, Steve. The ability to attract and retain talent remains top of mind for our clients as a combination of a tight labor market and the challenges that come with managing remote, onsite, and hybrid teams are driving increased demand for HR technology. These dynamics are reflected in increasing attach rates across our entire platform, particularly within our suite of modern workforce solutions, including recruiting, learning management, premium video, and surveys. Overall, our differentiated value proposition of providing the most modern and comprehensive product suite in the industry continues to resonate in the marketplace, the demand environment remains strong, and our sales teams executed very well in fiscal 22. In Q4 and fiscal 22, we saw strong sales execution across our entire market, driving healthy sales activity and setting us up for a strong fiscal 23. Building off this strong momentum, we've expanded our sales force for fiscal 23 by adding new sales reps, while at the same time investing in training initiatives and marketing and channel programs to drive productivity which saw steady improvement throughout the course of the year and now sits ahead of pre-pandemic productivity levels. Sales reps have increased by 18% from 588 in fiscal 22 to 694 in fiscal 23, and I'm pleased that we are fully staffed heading into the new fiscal year. We also continue to invest in our channel initiatives, and we remain pleased with the consistency in our referral channel, which continued to deliver more than 25% of our new business in Q4 and full fiscal 22. In addition to an 18% increase in sales reps for fiscal 23, we remain committed to continuing our investments in digital marketing and digital lead gen to support our go-to-market motion. We continue to see strong demand across our target market, and we're very pleased with the momentum our sales team has built headed into fiscal 23. Additionally, from a macro perspective, key data points remain strong, including workforce levels at our clients, which increased each month in Q4 and into July. The strong culture at Paylocity continued to be recognized externally this fiscal year as we were named to the Inc. Best Led Companies list, Fortune 100 Fastest Growing Companies, Forbes Best Midsize Employers, Forbes Best Employers for Diversity, and Forbes Best Employers for Women. Echoing Steve's comments, I would like to thank all of our more than 5,000 employees for a fantastic fiscal 22, which would not be possible without their dedication and commitment to our clients. I would now like to pass the call over to Ryan to review the financial results in detail and provide fiscal 23 guidance.

Thanks, Toby. Total revenue for the fourth quarter was $228.9 million, an increase of 36.7%, with recurring and other revenues up 36.2% from the same period last year. As Toby noted, our sales team had a strong quarter, and we were pleased to come in $9.4 million above the top end of our revenue guidance. For the year, recurring and total revenue growth was 34.2% and 34.1%, respectively. And as Steve mentioned, fiscal 22 represents our largest annual growth since fiscal 16. Adjusted EBITDA for the fourth quarter was 59.3 million, or 25.9% margin, and exceeded the top end of our guidance by 6.8 million. For fiscal 22, adjusted EBITDA was 237.8 million, or 27.9% margin, resulting in leverage of 120 basis points versus fiscal 21, despite the roughly 50 basis points of dilutive impact from the Blue Marble and CloudSnap acquisitions. We continue to be pleased by our ability to drive exceptional revenue growth to combine with strong profitability. On a combined basis, our 34.1% revenue growth plus 27.9% adjusted EBITDA margin puts us above the rule of 60 for fiscal 22. 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 14.0% of revenue in the fourth quarter, and on a full year basis, total R&D investments were 13.7% of revenue. On a dollar basis, our year-over-year investment in total R&D increased by 24.7% in fiscal 22 when compared to fiscal 21. We continue to believe our investments in R&D provide us with valuable product differentiation and the ability to drive future growth. On a non-GAAP basis, sales and marketing expenses were 23.4% of revenue in the fourth quarter and 22.4% for fiscal 22. On a non-GAAP basis, G&A costs were 13.2% of revenue in the fourth quarter versus 14.0% in the same period last year. Full year G&A costs were 12.9% of revenue as compared to 13.1% in fiscal 21, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Briefly covering our GAAP results, our Q4 gross profit was 151.6 million, operating income was 18.8 million, and net income was 15.1 million. For the full year, gross profit was 565.6 million, operating income was $84.6 million and net income was $90.8 million. In regards to the balance sheet, we ended the year with cash and cash equivalents of $139.8 million with no debt outstanding. We're pleased with our performance in Q4, which included another strong quarter for our sales team while also identifying opportunities to demonstrate scale in operational and G&A costs. And we're happy with the progress we made to that end in Q4 and in fiscal 22. In regard to client health funds and interest income, our average daily balance of client funds was 2.2 billion in Q4 and 2.0 billion for fiscal 22. We are estimating the average daily balance will be approximately 2.0 billion in Q1 with an average annual yield of approximately 80 to 100 basis points or approximately 4 to 5 million of interest income in Q1. On a full year basis, we are estimating the average daily balance will be 2.4 billion with an average yield of approximately 100 to 125 basis points or approximately 24 to 30 million of interest income in fiscal 23. Additionally, please note that our guidance includes the impact of last week's 75 basis point interest rate increase with a further assumption that interest rates will be approximately 3.0% as of calendar year end 2022. Our guidance does not currently include any changes to interest rates in calendar 2023. Finally, I'd like to provide our guidance for Q1 and full fiscal 23. For the first quarter of fiscal 23, total revenue is expected to be in the range of $237.3 million to $241.3 million or approximately 31% to 33% growth over first quarter fiscal 22 total revenue. And adjusted EBITDA is expected to be in the range of $55 million to $58 million. And for fiscal 23, total revenue is expected to be in the range of $1,087,000,000 to $1,092,000,000 or approximately 28% growth over fiscal 22. And adjusted EBITDA is expected to be in the range of 314.5 million to 318.5 million, which represents 120 basis points of leverage over fiscal 22. In fiscal 23, we are guiding to a key milestone in our journey as we cross over 1 billion of revenue, while remaining focused on providing our clients with industry-leading software and world-class service, while also building a great culture for our employees. We enter fiscal 23 with a high level of confidence in our ability to continue to grow and scale our business against the backdrop of a very large and attractive addressable market. I would also like to thank all of our people and teams across the business that made fiscal 22 successful. Operator, we are now ready for questions.

Thank you. As a reminder to ask a question, you will need to press star 11 on your telephone. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Scott Berg. I'm sorry, Scott Berg with Needham & Company. Your line is open.

Hi, everyone. Congrats on the great quarter, and thanks for taking my questions. I'm not sure who wants to field this, but let's start off with your performance in the quarter. by what I see, it looks like your best revenue beat in at least five years. How should we think about that beat in the quarter? How much of it was driven, say, from strong sales, strong implementations of new customers versus maybe some incremental impact from interest income from client funds in the quarter?

Yeah, so I would say it's really business execution that drove that. There's probably no big one-time items to call out. We really had a great year-end selling season, which builds into the quarter. So January is really important from a selling perspective. Also, strong retention through that quarter. And so as you kind of take the momentum from third quarter, plus the strong performance in fourth quarter, that was really the biggest driver in terms of getting us the revenue beat you mentioned.

I got it helpful. And then, Toby, I think you're talking about the number of sales reps going into the fiscal year here, the new year. How should we think about the growth of those reps? Are you targeting a segment maybe, you know, for new investments more than other areas? Or is it pretty well sprinkled out between kind of your strategic, your core historical segments and the larger segment you're now starting to target more aggressively?

Yeah, Scott, so we grew reps overall 18%, which is roughly in line with what we would have done historically and coming into the last fiscal year. I mean, to your point, I mean, it's pretty well spread across the different areas of the business, so I wouldn't say there was any specific concentration. Pretty evenly spread and growth rate that's roughly consistent with what we would have done year to year historically. I think, adding on to some of Steve's points, I mean, the sales team executed really well and, you know, really happy with how they finished the year and came into the quarter, and I think we're pretty well set up for 23. Great.

Congrats on a great quarter. Thanks again. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Brad Reback with Stiefel. Your line is open.

Great. Thanks very much. I don't know who wants to take this, but as you guys think about sort of what's going to be an incremental $25 million, if not more, of float interest income, how do you sort of strategize around what gets invested? versus what gets allowed to fall to the bottom.

Yeah, it's a good question. I think consistent with what we said in the past, first it's about sizing our investments overall, absent the interest environment, and that's kind of how we try to run the business in a normal environment. We're pretty excited about some of the investments we've made in R&D. We've talked about great sales performance, but part of that is because we've got a differentiated solution and the new products that we've launched are attaching at a nice rate and they're actually having great success. We think about going into next year and continuing to increase the investments in R&D based off the ROI that we've been able to drive there. At the same time, we'll stay kind of aggressive about trying to grow the business and do that in sales and marketing. And I think from the reality, you've got pretty nice leverage in the model in terms of what we've actually forecasted. A lot of that does come from the interest revenue. That's really the way we thought about it. Let's fund our investments in sales and marketing, R&D, make sure we've got the people that we need and we're hiring ahead when we need to. And I think when you put that all together, you see most of the interest revenue ends up flowing down to the bottom line. But we will look selectively for opportunities to make investments in those areas.

That's great. And just a quick follow-up. I think early in the script, you guys talked about increasing productivity in the sales force. How much of that's coming from just better quality leads that enclose more business versus higher ARPU because they're selling more product into larger customers? Thanks.

Yeah. So probably multiple levers is driving the productivity. I think we called it on the last earnings call. We definitely have seen success at the higher end of our target market. So that is a contributor to ARPU growth. At the same time, we've also called out this time and last time just the newer products and the higher attach rates than what we expected. That's another nice driver from an ARPU perspective. And so, really, we've been able to keep, you saw the unit growth that we posted for the year kind of right in line with where we were on a pre-pandemic level. And so, you know, we've been able to maintain units in a similar fashion, drive a little bit up market for the higher end, and just attach more products. And I think that's the formula for success right there.

That's great. Thanks very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Terry Tillman with Truist. Your line is open.

Yeah, thanks for taking my question and follow up and congrats from me as well. This is going to be product centric, so I don't know if this is for you, Steve, or who wants to jump on it. But when you're in sales cycles and there is actually some meaningful competition, How are things like community or video or some of these kind of newer technologies that really help with that remote workforce and collaboration, how often are they actually helping be kind of a decision factor to winning the business? And then the second part is, you know, you have community in the market, the Community Plus product. What's kind of a, without tipping your hat, like how do we see PEPY going from where it is now? I think it's about 440. Just any ideas at a high level of where we might go next and how you can enable these modern workforces? Thank you.

Sure. So I think on your first point, if you look at businesses really across America, one of their greatest challenges in today's environment with a low unemployment rate is just attracting and retaining talent. And I think if you have conversations with CEOs, that's at the top of their list of things that they're focused on. And so products like community and video and learning management and all of the features that go along with that, it's really focused on employee engagement and making sure that those employees feel like they're attached to that organization, the communication is really transparent, they can connect with people digitally, which is more required in today's environment. And so, yeah, I absolutely believe that that's part of the equation. We have to do all the other things right too, right? To save them time and make sure that we do payroll in an easy and simple way for everybody. And so when you combine the ROI embedded in the core solutions and you overlay our modern workforce, modules, we really believe that that's a big driver in terms of why we've got increased momentum in terms of revenue growth. The second part of your question, you know, I think we have an opportunity in many of the modules to launch maybe additional capabilities. Think of those as product line extensions and potentially monetize some of those. And we've done that historically very successful. And so we don't think that we're capped right now where we are for PEPY. We think we've got a good product like pipeline in our core products. And then as we think of these more modern capabilities in the launch of Community Plus, that does open a whole new arena of things that we can add and potentially monetize. So we feel good about the pipeline. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Bryant Virgin with Cowan. Your line is open.

Hi, good afternoon. Thank you. I wanted to just ask about the fiscal 23 outlook. As you built the growth forecast, can you talk about some of the puts and takes that went into that? Things like new sales attribution, assumed client employment levels. And really, how are you thinking about as you go through the course of the year, particularly the second half of the year, you know, in calendar 23?

Yeah, this is Toby. I'll start. I mean, I think from a philosophy standpoint, I mean, I think our guidance philosophy and our building of the plan philosophy for 23 is pretty consistent with how we've looked at it historically. I think we have a lot of momentum. I think a couple points. One is the demand environment, I think, has maintained strength. The sales team is executing really well, and so I think if you look at the momentum we had coming into Q4, we think that momentum carries into Q1. I think we have seen you know, the strength in our differentiation of the market with all the product items that Steve just talked through. So I think we view 23 as, you know, continued strength from a demand perspective and assuming the execution from a sales team and differentiation perspective maintained with the same guidance philosophy that we've brought, you know, pretty much year in and year out historically.

Yeah, Brian, I guess I'd just add from an employment perspective, as we talked about in the prepared remarks, we've seen continued improvement in each month in the fourth quarter and into July as well. But as we've planned historically and thought about from a guidance perspective, no assumption around changes. So what we've seen is what we've guided to. We have not assumed any further improvement or degradation in employment levels. Obviously, as we've said in the past, that is sort of the discrete changes that would either take us to the top end of guidance or somewhere within that range. that's how we've thought about this year, as Toby said, very consistent guidance philosophy. I think this year we provided some incremental details around interest income and yields and average daily balance to make sure that you all had a pretty good idea of what we were implying from a recurring revenue perspective. So as we put all that together and we look at the guide, we feel really good about being, call it 32% at the midpoint for Q1 and 28% for the year. And even if you take out the impact of interest rates. You know, you're looking at, you know, very high 20s to 30% recurring in Q1 and let's call it 25% or so recurring for the year. So I feel really good about where we are to start the year. And as Toby and Steve have said, a lot of momentum from a sales perspective.

Okay. Makes sense. I appreciate that detail, by the way. My follow-up I think I heard 16% client growth. Can you give us a sense of whether is there any material change in average client size as you exited this year versus last year? Just trying to reconcile the total revenue relative to that client count.

Yeah, so I think just going back a little bit of history, if you think about where we were pre pandemic, we had recently expanded the efforts in the low end of the market. So kind of under 50 employees. And so we had some folks dedicated to selling in that environment. And that was really a couple years prior to the pandemic. And you saw client growth pick up, we were kind of in that mid teens range for client growth. Then we expand into the under 50 market. You saw that tick up. And then now we're at the point, as Toby mentioned, we're really adding people across all the markets in a fairly uniform fashion. So the client levels kind of returned right back to where we were, go back three or four years ago. And so no real call out in terms of client size change because we've expanded up market and down market at the same time. and so you see us right back on the same unit numbers that we had before. We did call out last time, and I mentioned it earlier, we have seen a little bit more success upmarket, but when you also factor in the idea that we've expanded downmarket, you end up roughly in the same spot from an average-sized customer.

Okay, great. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Mark Marcon with Bayer. Your line is open.

Hey, good afternoon. I want to add my congratulations to a really strong quarter. With regards to the up market, which you were just talking about, Steve, can you talk a little bit about who you're seeing in the competitive set and what your win rates look like when you're going up in the final RFPs and what are the distinguishing, like how much do they value community and engagement relative to, say, some of the other attributes like your really strong service scores, things of that nature?

Yeah, Mark. So I think It's important to note that it's a competitive environment across all segments. And so you've got some competitors like ADP that play in all size segments and that we regularly see in the marketplace. And there are people that we see at the low end that you don't see at the high end. But it's pretty typical that somebody is evaluating two or three different options. And obviously we want to be one of those options. The other thing I would say is we don't disclose specifically win rates, but they're not that varied across the segments. So we've had pretty consistent success in being able to sell in all those segments. And then as you get larger, they get deeper on the functionality. So you're going to be demoing each of your product modules. They're going to be looking at more specific use cases that they have. It might be based off the vertical market or where that company is in their expansion. You know or whatever is happening. And so you just spend more time in the sales process There's a little bit more from a demo perspective And each company is a little bit different I will tell you I get an opportunity to get in front of some of these prospects and we do host some at our corporate headquarters and I'm always in front of them and you know things like community or modern workforce index and the algorithm behind that the idea of having best practices built in to be able to engage with their employees and it all really resonates because these HR departments are stretched really thin. They're having a hard time finding talent. And so they're looking for different and new ideas. And at the same time, they want a real easy to use platform that's going to save them some time and give them all the data that they're looking for. So it's really a combination of all of that.

That's great. And then with regards to, you mentioned the monthly users being up by more than 40% in terms of community and and then video being up 80%. What sort of take-up rate is that in the new clients that you're just signing on now? What sort of penetration are you getting there? And how are you thinking about pricing for those solutions as they're seeing such strong success?

Yeah, so our base version of Community is free and available to all of our customers. But I think Do all of our customers use that right away? We've got a pretty good take rate of them starting to use it for things like announcements and broad-based communications to all of their employees. And then over time, we give them different ideas and we drive usage over time by building new features into the product. And so it's a combination of driving higher utilization for new clients up front and then just reacting to client feedback and great things to use over time. And that's been the formula to drive utilization. Video, we do monetize video, and video has really gone at a nice clip for us, probably a product that maybe no one would have imagined four or five years ago. And, you know, we see probably, you know, think about it as roughly a third of our new customers, you know, using video right out of the gate, which we think is, you know, really, really great for a product that's only a couple years old. That's terrific.

Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Samad Samena with Jefferies. Your line is open.

Hey, guys. This is Jordan Barrett on for Samad. Steve, Toby, and Ryan, congrats on a strong quarter, and thanks for taking my question. So I wanted to touch on headcount. You know, in your prepared remarks, you said that the workforce of your clients increased monthly throughout the quarter, and guidance assumes no change in that going forward. So now that we have July in the rearview mirror, Touching on headcount growth specifically, are you seeing any slowdown or changes there into this quarter on the growth side of headcount there or any change in client job openings per se?

Sure. I think so far we're seeing no degradation from a macro standpoint, and I think that goes across all the key sales metrics that we would look at. And from a client-based perspective, we continue to see a lot of strength, as we talked about in the prepared remarks. Each month of the fourth quarter, we saw increases in And that held for July as well. So feel good about the start of the year. Obviously, we've talked about a lot of momentum from a sales perspective. And so far, we are not seeing any of those headwinds at this point.

Great. Thanks for the call there. And then a quick follow-up, not to beat a dead horse, but on the sales growth back to preventive levels looks great. In terms of the timeline to ramp these reps to full productivity, how is that timeline looking versus maybe pre-pandemic? And has that increased since maybe early 2020 when the pandemic hit versus now?

Yeah, so lots of variables go into sales rep productivity. I think a couple things that I would just call out. So certainly as they gain experience, they become more productive, right? So we've had really good retention of our longer-term sales folks. They definitely produce at a higher level. And then what we try to do as we go into the year is we try to get the hires on board as quickly So that you're not hiring all your salespeople in your first quarter, but you try to go into first quarter with most of your sales hires. And we love to be able to do that. And we were really well positioned going into this year. So if you can get that kind of months on board a little bit earlier, that can be a driver. So that's number one. I think number two is the platform and how differentiated it is. So if you've got a differentiated story, you do a great job you know bringing them on board and training them they can been going into this year so if you can get that kind of months on board a little bit earlier that can be a driver so that's that's number one I think number two is you know the the platform and how differentiated is so if you've got a differentiated story and you do a great job you know bringing them on board and training them they can ramp faster with that differentiated story and so I think both those things are factors for you know some of the new hires that we bring on board and And the experienced folks have just shown us over time that they're able to sell more. Each year, we've broken the highest amount any sales rep has sold every year for probably the last five years and even more than that.

Great. Well, again, congrats on the strong results, guys.

Thank you. Please stand by for our next question. Our next question comes from the line of Alex Zukin with Wolf Research. Your line is open.

Hey, guys. This is Ryan on for Alex. Thanks for taking the question. Just wanted to get a quick update on Blue Marble, maybe first how the internal integration is progressing and then the traction with customers. And then from a revenue standpoint, I know this year is about 2% of revenue or expected to be. How are you thinking about that contribution next year?

Yeah, so Blue Marble was acquired a year ago in September, so we're kind of coming up on the anniversary, and we're very happy with the integration. I think the way to think about Blue Marble is it's probably not a product that all of our clients need. It's a product that a subset of our customers need, and it's the customers that have international employees. We have found integrating into the sales process for those that have international employees, it can not only be a differentiator, but obviously becomes an incremental revenue opportunity for us. And so we're pretty happy with kind of the go-to-market integration These things take longer from a product perspective, so we've definitely made progress, but we see a lot of opportunity to further integrate that going forward. And we've been really happy with the team that we're able to acquire and bring on board and the talent that we've got in a space that we think just naturally grows over time as globalization increases and people have more employees in different countries.

Great. And then just to follow up, circling kind of back on the macro question, you know, obviously not seeing any degradation, but how should we think about that moving forward? You guys obviously issued a really strong guide, but how should we think about the level of conservatism that could potentially be built into that just given there is some uncertainty out there still?

Yeah, I would tell you that we historically guide to what we see right in front of us. And the nature of what we do is we look at how many people did you have a year ago that you were paying and how many people do you have now. And we look at that across the client base and we can see it every day, every week kind of thing. So it's very real time in terms of us looking at that. And I think to Ryan's point, our clients continue to add employees relative to where they were last year. We've also called out that this has never been like an accelerated recovery. This has been a gradual and slow, so these are small percentages that we see, but it is positive. And so as Ryan mentioned, we just assumed kind of a flat environment for the balance of the year. I have no idea if that's aggressive or conservative, to be completely honest with you. It's consistent with the approach that we've taken before. You'd have to have a view on the macro economy to have an opinion there, but from all the data that we see, we feel like it's the right approach for our guide.

Great, thank you, and congrats again.

Thank you. Please stand by for our next question. Our next question comes from the line of Brian Peterson with Raymond James. Your line is open.

This is Chase Donovan on for Brian. Thanks for taking the question. I just want to dovetail on the Blue Marble question. Obviously, we've seen a pullback in both public market and private market valuations. Just curious, any update on your M&A appetite and the ability to accelerate the product roadmap? Thanks.

Yeah, I think we've been pretty consistent in terms of how we've approached M&A over time. I mean, I think our view has been that we want to continue to grow the platform and many of the new solutions that we've launched. We've built organically, and I think the view on anything that we've done from an M&A perspective is we have to have a belief that we can integrate anything. It's got to be strategic, and it has to be able to integrate onto the platform seamlessly, both from a user experience perspective and from a data flow perspective, and I think that's the approach that we've taken with anything that we've acquired, and I think that's the result that we've produced as we look at any of the solutions that we've launched. And so I think our view is that Steve is talking about some of the differentiation we've been able to drive through the modern workforce solutions. That's been the approach that we've taken, and I think that approach would hold true as we look forward into 23 and anything that we might do going forward.

Very helpful. Thanks.

Thank you. Please go to our next question. Our next question comes from the line of Robert Simmons with DA Davidson. Your line is open.

Hey, thanks for taking the question. So this was your larger speed versus guidance in years, really going back to the ACA days. Other than the rates going up, what changed from when you last reported until today? Was it a lot of... opening up and closing and going live in just those last eight weeks of the quarter? Was there a lot of sales back to base? Was there pricing changes? What was the surprise for you guys?

I don't think there's one big surprise. I think we had really great execution from a sales perspective, so that was incremental to what we had believed when we guided at the time. The workforce remained positive throughout the quarter, and again, we kind of guide to think about it relatively flat, so that is certainly helpful. Our implementation team did a great job getting everything started. We didn't talk about that, but that was also really positive in terms of you know, getting the clients not only submitted, but get them up and running and started. And we had great retention over the last so you like the whole bunch of factors that really kind of went into delivering these results.

Got it. And then you talked to the impact that inflation is having on the business clearly not too negative overall, given the market expansion you're looking at for this coming year, but curious what you're, what you're seeing there on both sides of things.

Yeah, there's a couple different ways to think about that. So one, it absolutely is having an impact on our clients in different ways. Certainly wage inflation, you know, which you see across all industries becomes challenging. And so clients are trying to manage that. We obviously manage that ourselves being, you know, an employer with over 5000 employees. So that's certainly one dimension. And that puts more pressure on the HR teams and the HR teams are not trying to figure out other ways to create differentiation and manage You know, maybe variable comp in a different way, create incentives for employees, really trying to keep them engaged. And that kind of goes back to the value proposition that we are trying to tell people. We're not only going to save you some time, but we're going to really help you create an engaging environment for your employees. And each little piece of differentiation hopefully helps you pick up your employee retention and the attractiveness that you have as an employer And I think that's part of the story. The inflation environment has just been tougher in a tight labor market. But I think from a Paylocity perspective, we've been pretty pleased with our ability to attract and retain talent. We've really been able to add heads across the board, talked about being ahead on sales. We've historically talked about really being able to also hire from an R&D perspective to areas that can be challenging. So we haven't seen it so much on the sales side, but we certainly see the impact of the client.

Thank you. Goodbye for our next question. Our next question comes from the line of Jason Salino with KeyBank. It's open.

Perfect. Thanks for fitting me in. Maybe just one question. Employee engagement, that was a really high priority among businesses last year with all the skilled labor shortages. How do you view this focus and engagement as a driver for the upcoming fiscal year? And then, conversely, how might it change as a priority if, say, employee demand reaches more normal parity levels? Thanks.

Yeah, so it's a good question. I think that the pandemic accelerated some of the labor shortage that we see in the market today. However, if you take a step back and you think of the number of people entering the labor force each year with Gen Z versus the number of people exiting the labor force each year, there is less people entering versus exiting, and you end up with this kind of shortage that naturally creates some level of tightening. And so I think this is going to be a theme that will last a long time. It might not necessarily be as tight as it is now, but I do think that because you've got less people entering the workforce, more people exiting, and we're going to have that over the next decade, that just managing employees and the talent pool that you have in an increasingly knowledge-oriented economy is just going to be a challenge for customers. And we think that employee engagement and the message around that will really last over time and create the right differentiation for us.

Perfect. Thank you.

Thank you. Please stand by for our next question. Our next question comes from the line of Daniel Jester with BMO. Your line is open.

Great. Thanks for taking my question. Maybe a little bit of one from left field, but I'm wondering on retention, have you looked at retention for your customers who have sort of a hard back to the office policy over the past year? maybe how they retain the platform relative to companies that have now chosen to go permanently remote or hybrid. Are you seeing any differentiation or retention of pay loss between those types of businesses?

So I don't know if I could answer that question directly because that's not something that we necessarily track. There might be some indicators in our platform of clients that are more back to work, but it would be difficult to get at that. What I can tell you is the companies that are leveraging our digital communication tools like community that are doing more from a digital recognition with impressions that are using video. And when we compare those companies to the like companies in same industries, they do have a 15% higher retention. So I don't know the answer to that, right? I don't know if those companies are ones that are more remote or if it's a mix where they're back to the office. So I can't answer the question directly, but I can tell you that the tools that we have absolutely impact the customers, meaning those that are using them the most do actually have better retention than their peers.

Great. And then maybe just a couple quick ones for Ryan. First, on CloudSnap and Blue Marble, are they going to be dilutive or neutral in sort of the guidance for the year ahead? And then maybe just can you talk us through the mechanics of the interest rates increase on the flow balances. I guess why, if you have a 3% sort of baked in by year end, why couldn't that yield potentially go higher quicker? Thanks.

Sure. So on your first question around Blue Marble and CloudSnap, all of that is factored into the guidance. So when you look at what we're guiding on a full year, 120 basis points of leverage, we are incorporating any remaining headwind. Although as you start to anniversary both those acquisitions here in the in the fall and early winter, you don't have that same go over challenge, but that is factored into guidance. I think as we look back at 22, really pleased to be able to see 120 basis points of leverage with that headwind that you referenced, but that is in the guide already. Second point, I think on interest income, we're obviously starting to see improvements in interest income on client funds as rates go up. As you look at sequentially, Q4, $2 million of interest income. If you look at the detail in the prepared remarks, we're expecting $4 to $5 million in Q1, so that will double sequentially. And then when you look at the full fiscal year, sort of $30 million or so in the top end versus $5 million this year. So we're obviously seeing a tailwind there. And I think over time, as we will work with our banking partners to continue to push for higher rates, but I feel like we're seeing that tailwind, and as I said, certainly we'll look to beat that 100 to 125 basis points that's in the guide. Probably the last element there is, as we've talked about historically, there's a timing element here, right? As you see rate increases, there's a period of time before those factor in for us. So the 75 basis points we saw last week, we don't have that yet in our accounts, right? So that's going to take some period of weeks before that factors in. And then the remaining rate increases that get us to that 3%, those are sort of in the fall and into the early part of the winter. So again, those are smaller, but period of time there. So when you look at it on a blended basis, we think probably 100 to 125 basis points is a good point to start the year. But just like everything else, we'd love to be able to be in a spot where we can overperform. Great. Thank you very much.

Thank you. Please stand by for our next question. Our next question comes from the line of Arvind Ramnani with Piper Fendler. Your line is open.

Hey, thanks for taking my question. I'm not sure if you already provided this, but can you provide the aggregate workforce at existing clients, did that expand or does that contract?

Sure. So, you know, we've got over 33,000 clients and the average size customers, a little more than a hundred employees. And one of the things that we called out is workforce levels are up slightly. And so what that means is we take the same clients that we had a year ago. We look, how many employees did they have? Do they have more or less employees? Um, and that has, you know, since we've gotten through the pandemic steadily been improving and it has increased the call out here was in the quarter. And even in the month of July that has continued to increase. Small percentages, smaller numbers, but it is positive.

Terrific. And, you know, even if we were to go to a point where the number does shrink, I just want to confirm the bigger driver for revenue growth is new logo ads and selling additional products at existing clients, right? Those are the two biggest levels for growth as opposed to, like, number of employees in aggregate. Yeah.

Yeah, like when you think of the number of employees on the platform aren't growing by a material percentage, right? It's relatively small, very, very small actually. So it's a slight help for us from a revenue growth perspective when that's growing. The other context I like to give people, this is a weird GDP kind of environment, but if you're in a normalized environment and GDP is growing at a couple percentage points, we don't get a couple percentage points of employees added. It's usually a little less than GDP. And so that kind of gives you kind of the context. It is very, very small.

Terrific. And then just a separate question. You know, I know in community and video creation, you'll have typically not explicitly charged for it. But now that you're seeing greater adoption, are you charging for it or is that somewhat in the plan?

Yeah. So our plan has always been, you know, we believe strongly that employee engagement is going to be really important for a long time. And so in the base product, you automatically get engagement tools within community. Um, we added video as a premium product that we do charge for. Um, and then more recently we added community plus, which has a bunch of other capabilities, um, to engage with your employees in a different fashion. And we see thematically there's opportunities over time to kind of expand in that engagement space. And so you'll see us continue to add features, capabilities, drive utilization, and over time look for monetization opportunities.

Perfect. Thank you.

Thank you. Ladies and gentlemen, this concludes our Q&A session. I would now like to turn the call back over to management for closing remarks.

Yeah, just take a quick second to thank all of you for your interest in Paylocity. We're pretty proud of the year that we had in fiscal 22 and looking forward to continued success in fiscal 23. Have a great evening.

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