Thank you for joining us for TD Cowen's second annual virtual HCM Summit. Today we have with us Ryan Glenn, CFO of Paylocity. First, thank you for joining us today, Ryan. Yeah, thanks, Jared. Appreciate you having me here at the conference. Anyone in the audience who does want to ask a question can do so through the platform or emailing me at my email address, which is jared.levine@tdsecurities.com. And to get it started, let's start with the demand environment, Ryan. You've called out an elongation of sales cycles, particularly in that up market for multiple quarters now. Would you attribute that largely to macro, and did election uncertainty contribute to this at all? Sure, yeah. I think, you know, if I think back, we did call out on the upper end of our target market. So think about that as companies with 500-plus employees. On our earnings call last February, so, you know, roughly 10 months ago or so, we did say that we were seeing some level of elongation in the sales cycle. I think where that has shown up with those larger clients has really typically been either incremental decision-makers involved in the process. So now I need a CHRO or CFO signing off on the deal, or maybe clients that are saying, "Hey, I want another demo or two," than we would typically have seen historically. Or clients that maybe have said to us, "Hey, we love Paylocity. We want to go with you, but we are going to hit the pause button for one or two quarters until we work through some other underlying business challenges," and I think where we sit today is overall demand environment, we would characterize as stable. I don't think up market, it definitely has not gotten worse, but I think it has probably remained a touch elongated, so we continue to work through that. I don't know that I would point to the election specifically or interest rate uncertainty specifically as a specific driver. We have not heard from clients of like, "Hey, now that we have better visibility into either of those, we are willing to make a decision," so hard to exactly parse out underlying causes, but it certainly hasn't gotten worse. As you think about where we are today at the start of our fiscal year or one quarter in, felt really good about the sales team's performance in the first quarter, including that up market team. As we think about trends and momentum headed into January, which, for those that aren't aware, in this industry, January is the largest month for new client starts, we have felt really good about the momentum in those sales teams and where they're tracking across all segments, such that not only did we raise the revenue for the year by the Q1 beat, but we also have had incremental confidence in that team as well. Got it. And a key thing I want to flesh out is when we talk with investors, sometimes there is some skepticism that the solid pipeline commentaries from vendors such as Paylocity is due to the elongation of sales cycles inflating that pipeline size. I guess normalizing for that elongation of sales cycles impact, how does your prospective customer pipeline compare to recent years? Yeah, I think across the board it is up and at a healthy level. And I think, you know, we did talk about last year, and we did at the time call out both a bit of a longer sales cycle on the upper end. And, you know, I think candidly we said there were some things that we thought we could do on the upper end of the market to continue to drive better execution. So as you think about particularly that up market team, we've had a lot of success being pulled up market over the last few years. We've built out that team that's specifically focused on larger deals over the last couple of years. And I think as we've done that, a lot of those reps have been homegrown Paylocity folks who have had success in the core market and have "graduated" to larger deals. As we've continued to scale that team, the focus has been we feel good about being able to attract and retain the right talent, but how do you onboard them? How do you get them set up for success? We feel like, you know, the pipeline, not only for those newer reps that are ramping, but across each of the teams are at healthy levels. You know, that is one of the elements that has given us confidence in increasing our outlook for the fiscal year. Got it. And a key debate with investors is the attribution of the factors driving the implied organic revenue deceleration contemplated for your FY25, even taking into account some conservatism you alluded to. As we look at the estimated six-point organic revenue growth deceleration for FY25, how would you rank the drivers behind that? Is it, you know, between the law of large numbers, the demand environment, the competitive environment, the client hiring, or even other factors such as retention? Yeah, so I think as I step back and think about where our business sits today, we have guided to north of $1.005 billion in revenue this fiscal year with, you know, call it 12% or so recurring revenue growth, which has increased from where we expected it to start the year. I think as we've talked for the last probably six months or so, our desire has been to get back to a beat and raise cadence on the revenue side. That has been the guidance philosophy we've had for really the decade plus that we've been public. We saw some choppiness both from a macro and other factor perspective last year. I think where we sit today, we feel really good about the growth algorithm. We've been the fastest growing player in this space for the last several years. We're in a spot where I think you've pivoted the story a bit such that we believe we can continue to drive durable revenue growth. We feel like we're in a spot if we have strong execution, we can beat and raise over the course of this fiscal year, and at the same time, being able to tell a very balanced story where not only are you driving strong revenue growth and being able to beat raise, but you're seeing increasing adjusted EBITDA margins. You're seeing a business with free cash flow margins north of 20%. We've been able to manage stock-based comp, so we set a target of less than 10% of revenue for stock-based comp, which I'm confident will likely get into this fiscal year. We've been more active with the share repurchase program. So I think our view is big market, a lot of opportunity, expanding addressable market with the Office of the CFO acquisition, and we think we can drive revenue growth and profitability. Got it. And historically, revenue growth has been primarily sourced from new clients. How do you see the mix of growth from new clients versus that existing base evolving over, call it, the next three to five years? Yeah, I think it's a combination of both. So as you look at last fiscal year, you saw pretty equal contributions between net client adds of roughly 8%, as well as expanding average revenue per client of roughly 8%. Where we sit today is, as we've expanded the products, we've continued to add to the team of dedicated reps that are fully focused on upselling existing clients. And we've had that team now for, I think this is the eighth year. We started in 2016 with the Affordable Care Act. And as we've significantly expanded the products, we've added to that team by a pretty high percentage each year. So that has become a more meaningful portion of the business, although against a large sales team, still a pretty small portion of that team. So that has been growing, but most of the growth we're seeing is really net client adds and being able to land incrementally larger deals. Got it. And one thing investors ask is, as the deceleration in Paylocity's client growth in recent years, you know, it's been partially attributed to, you know, increasingly pushing upmarket, as well as just the law of large numbers. Is there any reason why that growth rate should uptick here over the medium term? Yeah, I mean, obviously, we haven't guided specifically for client growth. I think going forward, you know, I don't know that the growth algorithm will be perfectly 50/50, but I think you'll see, you know, whether it's 50/50, 60/40, but reasonably consistent contributions between client growth and average revenue per client going forward. I don't think one or the other drives meaningfully higher than the other. So, you know, as you look at this fiscal year, where we've guided to, you know, roughly 12% recurring growth, you probably get something pretty close to equal contributions, if anything, maybe a touch higher on the client side. Got it, and then in terms of upsells, do those tend to skew towards a certain employer-sized segment? Not necessarily, no. I mean, I think if anything, it's probably one where you see more of that team's success in the 50-plus employee segment of the market. But no, no, not specifically. I would not point out to like, hey, that team, most of their success is 500+ employees or 150-plus. I mean, I think it generally skews a little bit higher than the smaller end, but they've had success really across all segments of the, you know, roughly 40,000 clients we have today. Got it. And as you kind of look at that sub-50 employee base, the average client at 140, and then that up market client base at 500-plus employees, how do those attach rates compare across there? And what does that kind of inform you about the, you know, upsell opportunity within those different segments? Yeah, I think where we sit today with a product suite that's expanded pretty significantly even over the last few years, as you step back and think about all the new products that we've released just over the last few fiscal years, Rewards and Recognition, Market Pay, Employee Voice, some of the advanced pricing elements within LMS and Time and Attendance, I think each of those are products that have a compelling value proposition, and we're able to have success across the target market, so there's nothing, as I think about the types of products that our teams are upselling, where they would necessarily skew for, you know, only a large client or only a smaller client. I think most of those products we're able to sell across the client base, and you know, that's one of the reasons why we've added to that team every single year. We've added to this year. From a headcount perspective, we will add to that team next year because we view that as certainly something that has been part of our growth rhythm and algorithm on an annual basis, and we think that there continues to be opportunity going forward as well across, you know, effectively all segments and all industries of our client base. Got it. And then are there any modules that stand out in terms of that greenfield opportunity for first-time adoption of clients of a true third-party vendor solution relative to just, you know, competitive displacement? Yeah, I think a lot of those newer products that I just named, we are not replacing a separate third party. So if you think about Employee Voice, which would be a more premium version of our surveys product, some of those clients are simply upgrading from our base surveys capabilities. But many of clients, and this is a trend that we've seen throughout the pandemic now and in the, you know, the post-pandemic world, where companies viewed this as a gap, where they historically were able to maybe walk around or talk to employees, you know, in the break room in their office to get a pulse check of what's working and what isn't. As you think about the trend that companies have had to deal with over the last three or four years, the war for talent has been something that has been a real struggle for businesses, being able to retain employees against, you know, historically high inflation. So where you've seen those clients focus is, hey, I need a software solution to help me answer these questions. I want to be able to have not only pinpoint my teams based on individual departments, but I want to be able to leverage Paylocity's Employee Voice, where I'm able to look at multi-month, multi-quarter, and multi-year trends. So what am I doing that is working? What am I doing that is not working? Where am I seeing particular spots within a heat map where teams need to be able to focus incremental? That's something where they are not using a third party. That's simply a gap or something that they've tried to do through, you know, word of mouth or through a team, and they're looking for a software solution that's scalable and also is able to answer a lot of those questions that they probably haven't been able to do by doing this in a very manual way. Got it. So in your investor deck, you do disclose the mix of sources of new client revenues. ADP and Paychex have remained the largest source over time, consistently at or just under half that mix. Each of these vendors has also been recently citing record or near record revenue retention commentary and growing client counts. Are you witnessing the number of competitive at-bats or competitive takeaways for them as higher, lower, the same relative to recent years? I think this is important because it might not be appreciated that despite the improving retention rates by each relative to pre-pandemic, they could still be throwing off a comparable number of competitive client losses due to that larger scale. Yeah, I think, you know, across each of the key competitors that we see on a regular basis, we continue to take incremental business, you know, this year versus last year, so we have larger takeaways from each of those players. I think ADP and Paychex, as you mentioned, as you think about over the last decade, when we IPO'd in 2014, that was roughly half of our competitive wins were coming off of ADP and Paychex, and on a, you know, slow and measured pace over a decade period, as the market has become more diversified, as you've seen a number of players grow and scale, ADP and Paychex continues to represent the largest source, but it is now, you know, in that maybe 35%-40% of takeaways for us, where you've started to see many others diversify and get larger. You're getting more from your Paycom, your Paycor, your Dayforce, and some of the other private names as well. The market has gotten more diverse. But no, Jared, to the core element of your question, we continue to take market share incrementally so this year versus last year. Small movements up or down in retention have never really resulted in materially different demand environments for us. I think I can speak for others in this space. When you see ADP talk about retention ticking up 20 or 30 basis points or ticking down 20 or 30 basis points, that is not perceptible on a deal-by-deal level to us. Got it. And is there any reason that mix of new client revenue should change in terms of that trend of ADP and Paychex declining and other sources increasing over the medium term here? I mean, I think that has been a pretty slow and measured phenomenon. So there hasn't been a, you know, a 12 or 24-month period where that has moved meaningful. I think that has really been a, you know, roughly a decade trend. So there's nothing in the data last fiscal year or so far this year that I would tell you that the trends that I just discussed are going to change meaningfully. So I would expect on a go-forward basis for at least a reasonable period of time, ADP and Paychex continue to be the largest source. We continue to see 15%-20% coming off of local and regional providers. That too has been pretty stable. So it's a competitive market for sure, but underlying source of business in the recent times have been pretty stable. Got it. And then I do want to touch on Airbase here. So in October, you closed the acquisition of Airbase, a private spend and expense management vendor expanding Paylocity into the Office of the CFO. Can you discuss your right to win in this segment of the market, given historically you have been focused on that HR function? Sure. You know, I think as you step back and think about Office of the CFO, this has been a part of the market that we've followed really for the last probably 18 months or so. As you think back a year ago, this month, we closed the acquisition of Trace, which is our first entree towards Office of the CFO functionality with headcount planning software, so think of that as some elements of FP&A planning and budgeting software, and I think what has attracted us to the Office of the CFO and ultimately to Airbase is we think being able to have an integrated product suite where on a single pane of glass, as we go through a thoughtful integration, companies will be able to see all of their payroll spend that they have through Paylocity, as well as all their non-labor spend. And there's really nobody in our core market that has that offering. So not only do we think that will expand our addressable market, but as we have gone through a diligence process pre-close, as we've talked to not only our existing clients and understand the value proposition here, but also talking with the joint clients. So there's a number of clients that have utilized both Airbase and Paylocity in the past and understanding the value proposition, understanding the use cases, understanding how important third-party integrations are of that process across general ledger and ERP software. So we think it's an absolutely compelling value proposition. And, you know, over time, as we said on the earnings call, we think we can get to 10%-20% attach rate of our 40,000 existing clients, as well as attach it at a healthy rate on new deals. Got it. And do you foresee needing a separate sales force for Airbase, or will there be an integrated sales motion where reps can sell either HCM or Airbase? Yeah, that would be, you know, an area that we will look at very closely as we go through the integration. So where that sits today is Airbase has a dedicated standalone sales team. That team continues to drive forward and sell aggressively. So we have not shut down that team in the interim. What we will look through is what the right go-to-market approach is. So we certainly could arm our roughly 900 sales reps with office of CFO and Airbase functionality. An element that has helped in the past with prior deals, BeneFLEX being the most recent example, where we have armed our sales teams with that functionality and then had an expert-level overlay sales team that gets involved in the sales process, is able to demo that product, is able to talk about trends in that industry, is able to answer very specific and technical questions. So we will work through that, but would not surprise me if we ended up in a spot where our 885 sales reps across the U.S. sell it, and then they're able to leverage a level of expertise internally as they get to the part of the sales process that works through Airbase and broader Office of the CFO functionality. But we'll go through that in a thoughtful way over the next several quarters. Got it. Is there anything you can share regarding the growth profile of Airbase in recent years and any expectations on if this should be accretive to growth over the medium term here? Yeah, I think that that's a business that has grown at a very healthy rate over the last several years. We feel like there continues to be, you know, massive opportunity, both Airbase as a standalone business, as well as, you know, as I mentioned earlier, over, you know, a several-year period, being able to attach that at a pretty healthy rate for our, you know, existing clients as well as new deals. So as you think about, you know, getting to 10% plus attach rate, average Airbase client is paying them north of $20,000 today. So we absolutely think this is a massive opportunity and will help us not only drive strong revenue growth, but as you think about our target of $2 billion of revenue, being able to expand our addressable market, we think this is one way we're able to drive durable revenue growth for years to come. Got it. Do you want to touch on retention here? So you have reported consistently annual revenue retention at 92% +. Typically, we hear that January is the primary period for companies to switch payroll vendors. How much of your churn in the year typically occurs in that fiscal Q3? And how much visibility do you have to those clients switching? Yeah, no, I think you've characterized it right. It is just like that's the biggest month for new client starts across the space. That, of course, is the month where you would potentially see the largest month of client attrition. And that would be both controllable as well as uncontrollable attrition. So that is something that those teams, you know, one, retention is the key KPI for our operations team. So they're looking at on truly a daily and weekly basis, every single day of the fiscal year, but certainly during this most important time. So you do have a level of visibility. Most of our clients are giving us, you know, call it roughly 60 days notice if they're leaving. So you're able to get increasing visibility over time, although, you know, I think clients that are leaving for an uncontrollable reason, right? So if their company is going out of business, if they're acquired, those are going to be things that you probably don't have visibility in. So I think where we sit today is you have reasonable visibility, you understand the trends, but that is something that we will watch closely, not only through December, but into January. And I think when we get to our earnings call in the early part of February, we'll be in a spot where probably don't have perfect data, but you've got very good visibility into January, both from a starts and retention standpoint. And as we have in prior years, that will be, you know, one of the key elements that drives how we think about the back half of the year. I would tell you, though, as you think about where we sat as of five weeks ago at the times of our earnings call, felt really good about the momentum across the sales team, and I think we felt really good about some of the things that we're doing from an operational standpoint as well. Got it. And then Paylocity has made solid progress in expanding margins over time. Looking at your long-term adjusted gross margin target at 75%-80%, which compares to nearly 74% for FY24, just given you will have some float revenue headwinds upcoming here and some drag from Airbase, is this still an achievable target and if so, why? Yeah, absolutely. That is the target to your point where, you know, roughly 100 basis points from that today. And, you know, I think you do have some likely headwinds from float specifically. But, you know, our view is, you know, as we have historically, we're able to drive scale across the entirety of the P&L, but certainly from a gross margin and G&A standpoint. So our ability to drive leverage and efficiencies in that sales team, some of that is investments we're making in technology, whether that is being able to reduce client effort through API and other robotic process automation efforts, or being able to scale and take advantage of pricing power with third parties. So we absolutely have a high degree of confidence that 75%-80% is the right target. You know, as we have historically, I think you'll see us continue to make progress in that direction. Got it. And then embedded payroll has been a theme we've been following for some time now. Do you think it presents a competitive threat to the SMB payroll market as the number of potential vendors that can sell payroll could increase over time here? Yeah, I think today, I mean, obviously to your point, you've seen, you know, a handful of vendors probably talk about that. You know, even in those instances, I think they would characterize it as very early, very, very early earnings today and something that, you know, probably they would view as stepping up on a multi-year basis. But today where we sit, no, I mean, it's something that we would watch closely in conjunction with the competitive industry and market trends as a whole. But where we sit today, it has not been something that has impacted our team, although we'll certainly watch it closely going forward. Got it. A key theme from HR tech that we picked up on from HCM Suite vendors was demand benefiting from the consolidation of vendors to the benefit of HCM Suite vendors such as yourself. Is this also a trend that you're witnessing? Sure. I mean, I think broadly, as you step back and look at how we've been able to drive increasing average revenue per client, increasing attach rate of both our existing client base as well as new deals, some of that is greenfield, as I mentioned earlier, Employee Voice being one of the examples. You have clients that are wrestling with different challenges across their business, and they are looking to software to help solve that problem. But a multi-year trend, specifically in the part of the business, that part of the industry that we play on is companies have not chosen best of breed point solutions. So as you think about our average client having 150 employees, they are willing to sacrifice small elements from a functionality standpoint to be able to have all elements of their payroll and HCM product suite with one vendor. There are practical elements of that, which is most of our clients have small HR teams who are stretched thin, who wear multiple hats, and day to day, they do not have the bandwidth or interest in managing five, six, seven, 10 different best of breed vendors. And two, they want functionality that talks to each other. They want an integrated platform that has the same look and feel with all the products on the same mobile app, with integration across payroll and time attendance and performance management. So yes, you've seen some of the trends that you referenced, but I think there's an underlying trend that is really several years in the making where clients are looking for all of their HCM spend on a single vendor. I think that has been one of the elements that has broadly benefited us, but also something that has been one of the drivers of the increasing attach rate we've had going back to existing clients as well as with newer deals. Are there any of those modules or offerings that you find that clients are least willing to potentially consolidate to an HCM Suite vendor such as Paylocity here, or is it pretty uniform in terms of, you know, that willingness to consolidate those modules to that HCM Suite vendor? Yeah, it's been pretty consistent. I don't know that there's a module that comes to mind where, like, hey, this is a harder sell for clients. I think where we probably see attach rates increase over time is as new products come out, and some of the new products nobody else in the market has. So there's some level of evangelization going on. Over time, we see attach rates increase. Some of that is because, you know, the market catches up. Some of that is because you have more case studies and use cases to make the value proposition compelling for clients. Some of that is our sales team gets more comfortable selling those deals. So it is usually an element where you see attach rates increase the longer a product is out, but the attach rates have really driven off of really time to market versus there being a product or two that we see as a harder sell for clients. Got it. And Paylocity, through its history, has been focused on U.S. organizations here. Can you discuss what the primary hurdles would be to expanding internationally? Sure. So as you think about the market opportunity today, we are squarely focused on U.S.-based businesses. With that said, a handful of years ago, we did purchase a company called Blue Marble, which offers international capabilities for U.S.-based businesses, and we've been happy with that acquisition. I think it's been one of the competitive differentiators for us. Where that sits today is that it's fully integrated to the product suite, so for U.S.-based businesses that have some portion of their employee base internationally, being able to see on that single pane of glass all of your reporting capabilities across the payroll elements, not only of the U.S., but any of those countries they have employees in internationally, so that's really been the focus today, and as I said, that has been one of several elements, but certainly one element that has helped us see increasing success up market. I think that's where you'll see us likely focused today. You know, over time, you may look at acquisitions or partnerships internationally. You know, that is something that we balance with growth potential in areas we'd focus in the US. Obviously, we're focused in the very near term on Office of the CFO specifically. So over time, I think international probably does pose some interesting opportunities. How you get there between, you know, build, buy, and partnership, I think is something that we'll work through. We obviously have focused more on the sort of the partnership standpoint there. Probably not in the near term would you see us building native payroll in any specific countries. But, you know, over time, we do think there's different ways to take advantage of that market. In the last few minutes here, I do want to touch on GenAI. Can you talk about, you know, how you are currently using embedding GenAI within your offerings today and also if and or how you are monetizing these offerings? Sure. So I think we have had a number of elements of AI across the product suite. And I think we've been a spot where we've been a leader in the HCM space to that end. So as you think about some of the newer elements that we release, and we put a few press releases out really over the last 12 months or so. Most recently, we've talked about elements within Time and Attendance, for instance. So being able to leverage AI to recommend to clients which employees they would schedule for certain shifts based on how do you manage overtime and reduce overtime levels? On top of that, how do you look at certifications or other experience-based requirements? So being able to offer curated recommendations for clients on something that sounds very functional as far as how you schedule employees for shifts. Being able to leverage AI within Learning Management, so as employees continue to grow with the business, being able to offer them curated learning paths based on which role they sit in an organization and different classes or courses that they've seen similar employees take, or being able to leverage ways to drive certifications across individual titles within the business. Most recently, we've also talked about AI Assistant, which is a chatbot that is embedded across the platform that not only allows admins to be able to get quicker access to questions, but also allows employees to access things like how much time off do I have, which holidays does my employer offer, as well as many other administrative-based questions, so have not monetized that to date. That's certainly something that we will look at going forward, but we absolutely think there's elements of AI that will improve the client experience, be able to drive down interactions, meaning how often our service folks are interacting with clients, being able to increase margins over time as well, because we'll be able to leverage our team in a different way. Perfect. Well, we are at time here. I wanted to thank you again for joining us today, Ryan, as well as anyone in the audience. Absolutely. Thanks again, Jared, and appreciate everyone listening today. Have a good rest of the day. Thanks.