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Paylocity Holding Corp  (NASDAQ:PCTY)
Q2 2019 Earnings Conference Call
Feb. 06, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen and welcome to the Paylocity's Second Quarter of Fiscal Year 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will host a question-and-answer session and our instructions will be given at that time. (Operator Instructions) As a reminder, this conference call maybe recorded for replay purposes.

It is now my pleasure to hand the conference over to Mr. Ryan Glenn, Vice President of FP&A and Investor Relations. Sir, you may begin.

Ryan Glenn -- Vice President of FP&A and Investor Relations

Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal year 2019, which ended on December 31, 2018.

I'm Ryan Glenn, Vice President of FP&A and Investor Relations, and joining me on the call today is Steve Beauchamp, CEO of Paylocity; and Toby Williams, CFO of Paylocity.

Today, we will be discussing the results announced in our press release issued after the market closed. A webcast replay of this call will be available for the next 45 days on our website under the Investor Relations tab.

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 result 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 result 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's 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 regards to our upcoming conference schedule, Steve and I will be attending the JMP Technology Conference in San Francisco on February 25th; Toby and I will be attending the Raymond James Institutional Investors Conference in Orlando on March 5th; and Toby will be attending the William Blair Technology One-on-One Conference in Boston on March 13th. 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.

Steven R. Beauchamp -- Chief Executive Officer and Director

Thank you, Ryan and thanks to all of you for joining us on our second quarter fiscal 2019 earnings call.

The consistent performance we've seen over the last several quarters extended into Q2 of fiscal 2019 with total revenue of $107.2 million, an increase of 26.1% versus non-GAAP pro forma results for the same period last year.

Recurring revenue also grew by 26.1%, driven by new client additions and an increase in average revenue per client as we continue to see positive momentum with our newest product offerings. Broker referrals once again represented more than 25% of new business for the second quarter as we continue to invest in the channel.

Adjusted EBITDA for the second quarter was $26.1 million, which exceeded the midpoint of our guidance by $2.1 million. We remain focused on incremental investments in research and development and sales and marketing initiatives in the back half of fiscal 2019, while also continuing to drive operational leverage in the business as we work toward our long-term adjusted EBITDA margin target of 30% to 35% of revenue.

From a product standpoint, last month, we released our TPA solutions product and we received strong client feedback so far. Our technology-focused offering includes a number of TPA products such as health savings accounts, health reimbursement accounts and flexible spending accounts, providing users with a single unified access point for payroll, HR and benefit administration.

Our offering includes mobile and web access, allowing users to see transaction details and account balances, while also having the ability to submit claims all from our integrated employee portal. The addition of TPA solutions to our product portfolio increases our total per employee per year opportunity from $320 to $360 when a client buys all of our available modules. This is up 80% from the $200 per employee per year at the time of our IPO in March 2014 and speaks to our continued focus on expanding our product suite through sustained investments in research and development.

We continue to see positive momentum in HCM product adoption with our talent management suite performing particularly well across clients of all sizes.

In addition to expanded product suite, our commitment to product development continues to be recognized in the marketplace with Paylocity ranking high on multiple G2 Crowd Grid reports during the quarter, including placing number one in satisfaction on six category reports. Overall, in mid-market HR management suite, mid-market payroll, mid-market core HR and overall -- and mid-market benefit administration. G2 Crowd Grid report ratings are based on reviews gathered from real users who go through a verification process coupled with a unique algorithm application that calculate the customer satisfaction. Because the software review site provides real-time unbiased reviews to its users, business decision makers can objectively assess solutions. We also continue to be proud of Paylocity's culture and we were pleased to be recognized in December as a Best Place to Work by Glassdoor for the third straight year.

The second fiscal quarter is very busy time of the year for our operations employees as they work closely with our clients on year-end issues related to year-end payrolls, W2s, 1095s and annual tax filing forms for federal, state and local agencies. I want to thank all of our employees for their hard work and dedication during this very busy time of year.

I would now like to pass the call to Toby to review the quarter's result in detail and provide updated guidance.

Toby J. Williams -- Chief Financial Officer

Thanks, Steve. Before going into our financial results, please note that the following discussion on Q2 fiscal '19 revenue growth will be in comparison to non-GAAP pro forma results for Q2 fiscal ' 18. Consistent with last quarter, in the press release we issued after the market closed today, we provided a table that illustrates as reported and non-GAAP pro forma revenue results on a quarterly basis for fiscal '18.

Total revenue for Q2 was $107.2 million, which is a 26.1% increase from the same period in the prior year. We continue to be pleased with the consistency we're seeing in our business with Q2 marking our eighth straight quarter of total revenue growth in the mid 20%s. Q2 total recurring revenue was also up 26.1% from the same period last year, with recurring fees up 23.4% and interest income on client funds up 150.4%, primarily as a result of balance increases, increased average interest rates and because we continue to invest a portion of client funds in high quality available for sale securities during the quarter.

Our adjusted recurring gross profit was 75.3% and adjusted total gross profit was 69.8% for Q2 as we continue to focus on consistent revenue growth, while also driving scale in our business model.

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 14.7% of revenue in Q2 and on a dollar basis, our year-over-year investment in total R&D increased by 34.5%.

On a non-GAAP basis, sales and marketing expenses were 22.9% of revenue in Q2, as we remain focused on incremental investments in this area of our business in fiscal '19. On a non-GAAP basis, G&A costs were 15.7% of revenue in Q2 versus 16.4% in Q2 of fiscal '18 and we remain focused on consistently leveraging our G&A expenses on an annual basis.

Our adjusted EBITDA was $26.1 million or 24.3% of revenue for the quarter, which exceeded our guidance by $2.1 million at the midpoint.

Briefly covering our GAAP results. For the quarter, gross profit was $69.1 million, operating income was $7 million and net income was $5.7 million.

In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $104.9 million.

From a cash flow perspective, we generated $27 million in cash from operating activities in Q2 as compared to $26 million for the same period last year, which included $4.3 million of tenant improvement allowance. We remain confident that we will continue to expand free cash flow margin on an annual basis, including in fiscal '19.

Finally, I'd like to provide our financial guidance for Q3 and updated guidance for fiscal '19. For the third quarter of fiscal '19, total revenue is expected to be in the range of $135 million to $136 million or approximately 22% growth over non-GAAP pro forma third quarter fiscal '18 total revenue of $111.3 million. And adjusted EBITDA is expected to be in the range of $52 million to $53 million.

For fiscal '19, total revenue is expected to be in the range of $459 million to $460 million or approximately 23% growth over non-GAAP pro forma fiscal '18 total revenue of $372.1 million. This represents an increase of $5.5 million to our fiscal '19 guidance. And adjusted EBITDA is expected to be in the range of $129 million to $130 million, which represents an increase of $2 million to our fiscal '19 guidance.

In conclusion, we are pleased with our Q2 results, including the mid 20%s revenue growth we've generated over the last eight quarters, our ability to continuously demonstrate scale in our business and the progress we're making toward our long-term financial targets.

Operator, we're now ready for questions. Thank you.

Questions and Answers:

Operator

Thank you, sir. (Operator Instructions) Our first question will come from line of Justin Furby with William Blair & Company. Your line is now open.

Justin Furby -- William Blair & Company -- Analyst

Great, thanks guys. Steve, can you give an update on the SMB sales build out? I guess coming out of your key selling season, did you see enough early proof points to tell you that this is a market where you really want to step on the gas? And I guess, can you speak competitively, what you're seeing there versus mid-market? I think there is at least a perception that (inaudible) is tougher compete in that sort of sub-50 run market and I just wanted to get your thoughts there? And then I've got a quick follow-up. Thanks.

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. I mean, I think our thesis at the start of the year was really driven off the fact that we were seeing more success in the under 50 market with our existing sales force. And we're also seeing more demand for the broader HCM suite. I think as we've continued to make some investments in that space, that thesis has held true. I think we still think it's an interesting space.

We still don't think it's going to be much of an impact for this year and probably not a huge impact for next year, but as you fast forward two years or three years from now, we definitely think the fact that customers are buying more HCM products. We've got a pretty easy to use suite for them to be able to use, they're already buying more in that under 50 market, it's still a very interesting space for us.

Justin Furby -- William Blair & Company -- Analyst

Okay, got it. And then I guess just on the other side of it, the larger end of of your market toward the 500 plus space. I think a year ago or so, you called out some areas of opportunity to improve there. Can you give an update on sort of that market? And if there's been a derivative impact as you've further down marketing, carved up the sales team a little bit, does that help in the enterprise or in the upper mid-market? Thanks.

Steven R. Beauchamp -- Chief Executive Officer and Director

Yes, sure. I wouldn't call it any material change in terms of the upper end of the marketplace. I think we feel like we've got a pretty competitive product set. Of course, we're continually enhancing our product and adding releases based on the feedback that we get from our customers. So we think we continue to improve in that market.

I think I'd go back to where our -- where we were for selling season. We had a really good selling season. We're able to raise the year pretty significantly, after this quarter, you've got to be able to perform in all market segments to be able to do that and so upmarket definitely did well just as much as our core market.

Justin Furby -- William Blair & Company -- Analyst

Great, thanks very much.

Operator

Thank you. And our next question will come from line of Scott Berg with Needham & Company. Your line is now open.

Joshua Reilly -- Needham & Company -- Analyst

Hey, guys. This is Josh for Scott. Having already completed your $35 million recent buyback, what are your thoughts on capital allocation going forward with your free cash flow? Are you more focused on buybacks, acquisitions or other things?

Toby J. Williams -- Chief Financial Officer

Yes, this is Toby. So we closed the quarter about $105 million in cash on balance sheet and I think we continue to look for ways to drive growth and I think we'll take a look, certainly on an annual basis, at how we should think about capital allocation. And as you mentioned, we look to do the buyback as a means of managing dilution. I think we'll continue to look at things on an annual basis, but believe we have all eyes on growth at this point and we'll continue to view it that way. We'll look at the uses of cash that we can put against growth.

Joshua Reilly -- Needham & Company -- Analyst

Okay, great. And then just one more for me. December quarter is your busiest selling season. How should we think about the productivity of reps in the December quarter versus your expectations? And then how are you thinking about sales hiring in 2019?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. So I'll take the second part first. From a sales hiring perspective, we're really in the planning stages looking at what we think headcount needs to look like for next year. I think we've talked about the fact before, we really come out of the end of February, looking to hire in spring and then all the way into summer and we kind of set our target than our headcount productivity through that time period. So, I think we're in the thick of it right now. So, no update on that front.

And then I think from a selling season perspective, I point back to the fact that we've got a $5.5 million raise to the year from just a quarter ago. We feel good about where we landed in selling season. We went in fully staffed from a headcount perspective. And so, we'll give you more color as we wrap up the third quarter of the year, but sitting here today and being able to raise, we feel good about it.

Joshua Reilly -- Needham & Company -- Analyst

Great. Thanks guys.

Operator

Thank you. And our next question will come from the line of Brian Peterson with Raymond James. Your line is now open.

Brian Peterson -- Raymond James -- Analyst

Hi guys, thanks for taking my question and congrats on the quarter. So, just thinking about the product portfolio, now we're all the way up to $360 for the full suite. How do you balance investments, really trying to drive adoption into the installed base versus still looking to invest and trying to acquire new logos?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. So we definitely are seeing clients buy more at the point of purchase as new clients come on-board and that would still be our number one focus is really landing as many clients as possible and making sure they're buying as much at that point of purchase. Over time, as we mentioned over the last couple of years, we've gradually increased our effort to be able to get more penetration into our client base. It's not necessarily the top priority for us, but it's become more material over time. I think that remains still a really good opportunity for us as we look forward. If you think about growing product up to $360 employee per year, we know what our new clients are buying at and we've got a team of people that we've gradually expand over time that are going back into the client base and we'll continue to look at capturing that opportunity over time.

Brian Peterson -- Raymond James -- Analyst

Great. And just wanted to get your thoughts, obviously, there's been some high profile M&A in the space. Anything that you think might influence your competitive position over the next several years? Thanks guys.

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. Yeah, I mean obviously ULTI making the announcement that they're going private. They are certainly a competitor of ours, but not one that we see that frequently. There are some overlap at the top end of our segment and maybe the bottom end of our segment and obviously with them going private, they're still going to be a competitor in the marketplace. So, I don't think that that has any implication in terms of our ability to continue to grow our business or any implication even when we run into them head-to-head, which is just not that big of a percentage of time.

Brian Peterson -- Raymond James -- Analyst

Understood. Thanks, Steve.

Operator

Thank you. And our next question will come from the line of Brad Reback with Stifel. Your line is now open.

Brad Reback -- Stifel -- Analyst

Hey, how are you? Steve, so there was recently an article in the Wall Street Journal talking about small businesses broadly pulling back on spending. Given that you probably have a much deeper clientele than they from who they spoke to, are you seeing any of those signs in your client base? Thanks.

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. Well, I mean, you think about the fact that all of our clients have payroll and then some series of our HCM modules, it's really a must-have product. So they've got to make sure that their employees are being paid. You could argue that maybe some of the products that they might -- maybe able to look at as you know, items that they could consider not doing, but the reality is they get so much efficiency and the return on that investment really makes a lot of sense that we don't necessarily see spend differences a lot, whether the economy is growing a little bit or it's not growing as much. So, what I would tell you is, it would be difficult for us to see that and what they're purchasing, and then secondly, as we look at the number of employees per customers, whether that's growing, it's been pretty consistent over time. No call out there.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much.

Operator

Thank you. And our next question will come from the line with Samad Samana with Jefferies. Your line is now open.

Anupam -- Jefferies -- Analyst

Hi, thank you. This is Anupam (ph) on here for Samad. Thanks for taking the questions and congrats on the quarter. Couple of questions here. First, we saw Paycom come out yesterday and the -- saw significantly improved, I guess churn on their platform from -- in terms of usage programs that have been put in place. So, I -- first generally, like how has your churn been trending? And could you maybe talk about some of the specific programs or opportunities that you see in -- may bringing it down a little bit? Thanks.

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. You know, I think as we continue to get broader adoption of our HCM suite, we are absolutely seeing significant increases in employee and manager usage of our platform and that's growing much faster than our client growth. And so, if you think of spaces like talent management where we've had a lot of success penetrating these products, you're getting a lot more employee interaction in those applications and some of those interactions move from transactional interactions where you're looking at pay or punching or approving to really opportunities to be able to interact across the organization, and I think that's a big part of what's driving higher utilization rates, both in our mobile platform and our online portal.

Anupam -- Jefferies -- Analyst

Okay. And you said you just launched your TPA solutions. I was wondering how -- could you just give us some insight how you're monetizing this and how should we think about the impact that this would have going forward?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. The launch of our TPA solutions increased the maximum amount of product that a customer could buy from us, from the $320 per employee per year to $360 employee per year. And so, if you know anything about that business, there's a cyclical nature to it so, where people are often doing a lot of their purchases in the fall and for kind of a January 1st enrollment. What I would say is, we called out early on, we didn't think that product was going to have a big impact this year because it wasn't going to be ready until January.

So, we're going to build volume throughout this year and hopefully be in a good position to be able to hit the market from a sales perspective next fall. We absolutely do have live customers on the platform in January. So, we're happy to get feedback from them. The feedback from those customers has been very positive. The real point here is the ease of use of being able to get everything on my mobile phone or on my portal and I can get my balances, I can submit claims, it just makes it much more transparent to the user, and that's been received very positively.

Anupam -- Jefferies -- Analyst

Okay, thank you. That's it from me.

Steven R. Beauchamp -- Chief Executive Officer and Director

Thank you.

Operator

Thank you. And our next question will come from the line of Terry Tillman with SunTrust. Your line is now open.

Courtney -- SunTrust -- Analyst

Hi, there. This is Courtney (ph) on for Terry. Thanks for taking our questions. Something you talked about recently is getting more modules and the initial sale to a new customer, how has that been playing out and what did you see this quarter?

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah, I would say we've had really consistent success over the last several years. As we've added modules that take rate continues to increase after launch. And remember, our philosophy is, we get it out to market, we react to the customer feedback, we make it better, we improve it. And I think those investments in R&D and those improvements really yield higher penetration rates on those new sales.

So, if you go back to a couple of years ago, we launched recruiting, we launched expense, you know, I highlighted last quarter recruiting was on a really nice trajectory, expense was kind of where we expected, I think that continues. We're seeing better success with our newer modules from last year, like compensation and surveys. And so that's definitely part of the model as -- will drive higher levels of penetration on new sales and then back to the client base as we continue to launch these new products.

Courtney -- SunTrust -- Analyst

Thank you. Second question is, this is another quarter of mid 20% recurring revenue growth. Can you talk about how you see the sustainability of mid 20% growth going forward?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. At the start of this fiscal year, we came out with a new long-term model, because we had achieved all of the key metrics that we had outlined at the time that we went public. I think in the long-term model, we talked about 20% to 25% revenue growth being kind of our long-term target. And so, seeing that level of consistency for the last eight quarters being at the top end of that range in terms of our long-term range, we feel pretty good about, we're focused on 20% plus growth there, growth is our number one priority, as Toby said, even when we talk about use of capital, it's how can we continue to grow. It's a big market, we think we're in the early stages of this opportunity. We have a very low penetration rate in terms of our total TAM. And so, we think that as long as we stay focused on growth and we execute that the opportunity is in front of us.

Courtney -- SunTrust -- Analyst

Great. Thank you very much.

Operator

Thank you. And our next question will come from the line of Mark Marcon with Robert W Baird. Your line is now open.

Mark Marcon -- Robert W. Baird -- Analyst

Good afternoon. Let me add my congrats. With regards to the G2 scores which are impressive, wondering how that's impacting your ability to sell? It'd obviously be a positive, but I'm just wondering if you can talk about qualitatively what are you seeing in terms of sales cycles, acceptance of Paylocity et cetera, from a reputation perspective?

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah. As you know, being focused on mid-market, some of the enterprise oriented studies, we don't -- we wouldn't necessarily be part of it and our customer segments don't necessarily buy those research reports. So, we really love the idea of being able to look at reviews from our customers. And the transparency of those reviews, I think is really valuable and the customers put a lot of validity in them because they know it's not us paying to participate in a research report or anything like that. And so, it's very much like a Glassdoor review from an employee perspective. So it's really resonated well in the marketplace. As we've been able to talk to our customers and I think it gives the proof point that the investments in R&D is paying dividends in terms of the products and then we back it up with great service and I think if you take the time to read a lot of those G2 reviews, you'll see the combination of service and product come out in those comments.

Mark Marcon -- Robert W. Baird -- Analyst

I did and they were good. I was wondering how do you think that ends up impacting retention, which has been very consistent and you're going a little bit down market. So that has a negative impact, but then the economy is a little bit better. So, had -- as you are thinking longer term, do you think we can get some more improvement on the retention side?

Steven R. Beauchamp -- Chief Executive Officer and Director

We've been really consistent at greater than 92% retention mark, we're not giving you the exact rounding in the decimals on that, I think it stayed in the -- very much in the same range. And I think being above 92%, we think is really fantastic. If emerging market were to really take off, which would obviously be years from now, it really just because of the nature of our investment, it's possible that that has some impact, but that would be a great problem that's because we've got so much -- so many small businesses that is starting to impact it. So, I don't worry about that too much. I think for the near term, we feel good about our retention rates and we feel like we're in a position to be able to maintain that level of consistent performance.

Mark Marcon -- Robert W. Baird -- Analyst

Great. And then two quick ones. Can you just put a little bit of meat on the bones with regards to the revenue guidance just in terms of the split between the interest on client funds versus recurring versus implementation and other, particularly given the transition?

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah, I wouldn't -- I would look at our history over the last couple of quarters and then realized that interest revenue has been accelerating just based off the rate increases. And so, we obviously do not take any future rate increases in. We've been able to work with a lot of our partners to get most of that into what you're seeing for this past quarter. So on a go-forward basis, it's going to be less of an impact in terms of what the interest revenue would look like when you compare year-over-year.

Mark Marcon -- Robert W. Baird -- Analyst

Got it. And then longer term, just the margin you reiterated, the 30% to 35%, can you talk a little bit about the cadence as you balance growth versus profitability?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. I think it's important for us to continue to prioritize growth with 17,000 clients in a market with over 600,000 clients, we think there's a huge opportunity in front of us and we've been able to get good ROI on our investments whether they're in sales and marketing or whether they're in R&D and we will stay focused on that.

I think we've also got a history of being able to gradually march forward EBITDA and so, we were able to do -- reach our long-term target from IPO in about four years, a little more than four years. And so we've got a target of 30% to 35%. We think we'll march toward that in a fairly gradual fashion. If we see great opportunities to invest, we'll do it and we won't hesitate to do that, but we're committed to getting to that range.

Mark Marcon -- Robert W. Baird -- Analyst

Great. Thank you.

Operator

Thank you. And our next question will come from line of Pat Walravens with JMP Securities. Your line is now open.

Pat Walravens -- JMP Securities -- Analyst

Great. Thank you and congratulations. So, Steve, do you think -- and I totally get that you're focused on on your mission of marching forward, but do you think that the sector is going to see more consolidation and if so, what's driving that?

Steven R. Beauchamp -- Chief Executive Officer and Director

I think the sector is getting a lot of attention because there's a number of companies who are having success. I also think that the fact that clients are really trying to become as automated as possible, they are really trying to make sure that the managers and the employees are -- have the ability to serve themselves and become more efficient. And then when you add the fact that that creates a whole bunch of interesting data that you can share with the customers, I think there's this secular trend where these HCM components have just becomes so much more important to businesses. And I think the example I gave you, as we talked about the fact that you're seeing it in 30 and 40-employee companies that are asking for things like recruiting and performance management and expense management, and from my perspective, as they are hiring that next generation of employee, they absolutely expect to have modern, real-time, easy to use tools in the workplace. And I think that helps the sector as a whole. And I think we're kind of in the early innings of that shift.

Pat Walravens -- JMP Securities -- Analyst

Great. And can I just ask a quick follow-up, which is how's learning doing?

Steven R. Beauchamp -- Chief Executive Officer and Director

So, we have some learning components in our application. We mostly focus those on compliance courses, which is most applicable to our segment. So think about stuff like sexual harassment training, which is mandated in certain states to certain sizes. So we've had that available for our customers for a while. We talked about potentially building a learning module. We have not launched a learning module yet. We're still -- our program typically involves early adopters, client feedback, usage. I'd say. we're very much in that stage right now and when we're ready to be able to launch that, obviously we'll make that announcement and we'll add that to the PEPY opportunity, but that's probably next up on our list of product initiatives to hit the market.

Pat Walravens -- JMP Securities -- Analyst

All right. Great. Thank you.

Operator

Thank you. Our next question will come from the line of Shankar Subramanian with Bank of America Merrill Lynch. Your line is now open.

Gowrishankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Hi, thanks for taking my question and congrats on the results. Lot of the questions have been asked. So I'll just ask a more high level question. When you think about the HCM market now and compare it few years back, has your cost of acquisition for new customers start to get better or worse? And I'm asking that because in a market where cloud transition has been going on for the past six years and there's a lot of talk about maturing market in the next couple of years, do you see potential that your cost of acquisition gets a little worse as they go along? And if that's the case, how do you -- what programs do you have in place like get the (inaudible) built into acquiring new customers?

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah, I think you've got to look at the last five years in the context of the first couple of years after coming public and then we had those ACA couple of years, where there was certainly more activity in the marketplace. And so, our cost of acquisition today would certainly be higher than those ACA years, but it would look a lot more like it did when we first went public. And I would say absolutely, we're always looking for efficiency in terms of how we're driving our sales and marketing programs. We've talked in the past about different initiatives that we've tweaked and made some investments in. I think at the end of the day, this is a very profitable business and we feel comfortable being able to take advantage of the huge TAM in front of us and be smart about our investments in both sales and marketing and R&D and get the right level of ROI.

So I think something that we look at closely, we monitor, we tweak, we try to get improvements all the time, but we don't see any big shift in what we have to do to be able to win in the market.

Gowrishankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Got it. Just one follow-up to that. Do you see any early signs of how pricing pressure in the market in the sense that if -- you can see more people competing for the same set of customers. Do you see pricing being a -- becoming a problem?

Steven R. Beauchamp -- Chief Executive Officer and Director

No, I would tell you, it's always been a competitive market. I've been here for more than 10 years and it's been competitive from the time that I've got here, it's still very competitive. I don't think price is ever the biggest, most deciding factor, I think it really comes to a combination of product and technology that people are really looking at, the overall spend on average just isn't big enough for price to be the biggest mover. So I would say, there's been really no difference from a pricing perspective in the market.

Gowrishankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you, guys.

Operator

Thank you. And our next question will come from the line of Nandan Amladi with Guggenheim Partners. Your line is now open.

Nandan Girish Amladi -- Guggenheim Securities -- Analyst

Thank you. Good afternoon. Thanks for taking my question. So, Steve, you talked about how your per employee per year targets gone up as a result of the new TPA features. But on the broker side, how is this helping or how much is it helping bringing new brokers into the fold?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. Yeah, I would say, once again, we're pretty early in that TPA initiative. We just launched the product in January, so our first clients went on the product in January. And so, we really didn't hit that kind of early fall selling season and we knew that when we made the acquisition. We knew it was going to take us some time to build their unified experience for the employees. So I think what I would tell you, it's working as planned. We've had good reception from the brokers. We had a lot of feedback from the brokers that they're often looking for a reliable partner that had that balance between real strong technology as well as a service component. And I think so far so good.

I think TPA, from our perspective, starts to become a little bit more meaningful as we go into the next fiscal year and that would be the same thing in terms of resonating with the brokers. We think it's a great opportunity going forward.

Nandan Girish Amladi -- Guggenheim Securities -- Analyst

Okay. And a quick follow-up on the R&D front. I think you said in the script, R&D investment was up 34% year-on-year. This obviously tracks ahead of your other OpEx lines. What are you focused on right now and how much focus is there on the adoption of mobile apps?

Steven R. Beauchamp -- Chief Executive Officer and Director

Sure. I think our overall view on R&D is to stay in a very similar range over time. We think it's really important to be able to continue to invest in products. I think we've got a great track record of launching products and then seeing that average revenue per customer increase over time as well. So, we're getting good ROI on those investments. We definitely are seeing mobile adoption grow significantly faster than we are in the online portal from an employee perspective and manager perspective. And I think it goes to the point that people are using so much more of the HCM products, which naturally drive more of that adoption. It's certainly a trend that I think is driving the industry as a whole and it's one that we're realizing as well.

Nandan Girish Amladi -- Guggenheim Securities -- Analyst

Thank you.

Operator

Thank you. Our next question will come from line of Ross MacMillan with RBC Capital Markets. Your line is now open.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much. Steve, one for you. Just we track -- we track open reqs on your career site and that number really has gone up a lot this month, more than we've seen historically. And I just wondered, I know it's a seasonal strong time for hiring now, but anything to call out there in terms of either magnitude or timing?

Steven R. Beauchamp -- Chief Executive Officer and Director

No, I mean I think I talked about earlier on sales hiring. We start ramping that up really kind of toward the end of February. So we've obviously opened up a lot of reqs when it comes to looking at ramping for sales and it takes us from spring, all the way into summer before we get to those headcount. So I think cyclically, you generally see our open reqs be a little bit larger as we kind of enter -- finish this winter time frame and enter that spring time frame.

And also I would tell you that you know, year-end is a pretty busy time for us. So, a lot of our operational teams in January -- December and January, I should say, are kind of heads down dealing with all the year-end client related issues. So, in those cases, they're coming out of this in February and looking to kind of fill some positions that they had available to them. So, that doesn't surprise me at all, that makes sense.

Ross MacMillan -- RBC Capital Markets -- Analyst

Yeah. And just maybe another point on that is, in the emerging group -- the down market, is that -- are you staffing that up more meaningfully going into next fiscal year? And any sense for order of magnitude?

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah, we haven't give order of magnitude frankly because it's still in flight in terms of us deciding it. We are happy with what we've seen in terms of the reception from the customers and the product bundle that we put together. We've obviously had some hires working in the marketplace, we're happy with some of the referral channel relationships that we're building, but we're very early in that emerging market investment.

I would say it's safe to say we'll continue to hire in that space. We haven't finalized the exact numbers, we are going to try to give you color as we go into next fiscal year. I think what I would say, it's probably not that meaningful as you look at our cost structure this year and it could be a little bit helpful as we look at revenue next year, but it's going to take multiple years before that really, I think, becomes a growth driver for us.

Ross MacMillan -- RBC Capital Markets -- Analyst

Great. And maybe just one last one. I just -- it's a broader question, but given the strength of the employment backdrop we've had, maybe for Toby, does that actually impact retention in the sense that there's more headcount growth per customer, and is it meaningful to the retention metric? Thanks.

Toby J. Williams -- Chief Financial Officer

I mean I think -- I guess the way I would think about that is, when we see stronger economic cycle, higher employment levels to the extent that that translates to some increase in terms of the number of employees at one of our clients, I think we view that as a tailwind for sure. And I think that's a tailwind for the existing customer base. And so, if you think about the revenue in the base, I mean, yeah, it's a tailwind there. But I think we view it as -- it's a directional tailwind, it's relatively small in terms of the actual contribution from a revenue perspective. And I think the same thing is true when you see the cycle -- if and when you see a cycle turn, it becomes a headwind, but it's not all that big.

Steven R. Beauchamp -- Chief Executive Officer and Director

Yeah, Ross. Another way, I would say that is, we talk about this being very low small single-digit growth in employees on a percentage basis and if that growth was zero, our revenue would still be greater than 92%.

Ross MacMillan -- RBC Capital Markets -- Analyst

That's helpful. Thanks, guys, congrats.

Operator

Thank you. And I'm showing no further questions. I would now hand the conference back over to Steve Beauchamp, Chief Executive Officer, for any closing comments or remarks.

Steven R. Beauchamp -- Chief Executive Officer and Director

Well, thank you very much for all of you for your interest in Paylocity and I just want to take this moment to thank our nearly 3,000 employees for all their efforts over a very busy year-end season. Everyone, have a great day.

Operator

Ladies and gentlemen, thank you for your participation on today's conference. This does conclude our program and you may all disconnect. Everybody, have a wonderful day.

Duration: 39 minutes

Call participants:

Ryan Glenn -- Vice President of FP&A and Investor Relations

Steven R. Beauchamp -- Chief Executive Officer and Director

Toby J. Williams -- Chief Financial Officer

Justin Furby -- William Blair & Company -- Analyst

Joshua Reilly -- Needham & Company -- Analyst

Brian Peterson -- Raymond James -- Analyst

Brad Reback -- Stifel -- Analyst

Anupam -- Jefferies -- Analyst

Courtney -- SunTrust -- Analyst

Mark Marcon -- Robert W. Baird -- Analyst

Pat Walravens -- JMP Securities -- Analyst

Gowrishankar Subramanian -- Bank of America Merrill Lynch -- Analyst

Nandan Girish Amladi -- Guggenheim Securities -- Analyst

Ross MacMillan -- RBC Capital Markets -- Analyst

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