Paylocity Holding (PCTY) Q3 2019 Earnings Call Transcript

Paylocity Holding (PCTY -0.18%)
Q3 2019 Earnings Call
May. 02, 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 Paylocity's third-quarter 2019 fiscal year results. [Operator instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to 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 third quarter of fiscal year 2019, which ended on March 31, 2019. 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 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 measure to their 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, Toby and I will be attending the Jefferies Software Conference on May 8 in Los Angeles. Toby will be attending the Baird Global Consumer, Technology & Services Conference on June 5 in New York. Steve will be attending the William Blair Growth Stock Conference on June 6 in Chicago, and Toby and I will be available for meetings at the SHRM Conference in late June in Las Vegas. 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.

Steve Beauchamp -- Chief Executive Officer

Thank you, Ryan, and thanks to all of you for joining us on our third-quarter fiscal 2019 earnings call. The consistent performance we've seen over the last several quarters extended into Q3 of fiscal 2019, with total revenue of 139.6 million, an increase of 25.3% versus non-GAAP pro forma results for the same period last year. Recurring revenue grew by 25.4% driven by new client additions, improved HCM product penetration and an increase in interest income on funds held for clients. The third fiscal quarter represents our largest quarter of new client starts as many companies prefer to switch providers at the start of a calendar year.

We were pleased with the volume of new sales in the quarter and the execution by our implementation teams in onboarding our new clients. Broker referrals remained consistent, once again representing more than 25% of new business for the third quarter. We continue to make investments in the broker channel, which has provided us with an efficient lead generation source, resulting in new client additions to our platform in both our core target market, as well as the smaller end of our segment. We remain focused on investing in channels to add new partners and create deeper relationships with our existing partners.

The spring is also a busy time for hiring our sales team. We are pleased with the progress we've made in growing our sales force in advance of next fiscal year. Paylocity's strong employment brand in the marketplace as a great place to work has allowed us to on board many sales reps with previous payroll and HCM industry experience, as well as talented individuals with broader business-to-business experience. Adjusted EBITDA for the third quarter was 54.8 million, which exceeded the midpoint of our guidance by 2.3 million.

We continue to focus on incremental investments in research and development and sales and marketing initiatives in 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. As a reminder, the third fiscal quarter is our highest-margin quarter due to the recurring fees collected for W-2s and annual tax form filings. Calendar year-end is a very busy time of the year, requiring significant operational planning and coordination to handle the increased volume of client interactions. We continue to make investment in a variety of cross-functional process initiatives, which have allowed us to maintain a high-touch experience as we grow our product portfolio.

On our earnings call in November, we announced the launch of Paylocity Education and Knowledge, or PEAK, a free self-service information resource for our clients that also contains supplemental training materials and trending topics for payroll and HCM professionals. Since that time, we've seen strong client adoption of this resource, including more than 60,000 unique logins. These service-related investments, together with our dedicated service teams and continued focus on product innovation, has allowed us to consistently maintain revenue retention above 92%. Our sustained investment in R&D continues to pay dividends as the strength of our product suite remains the No.

1 reason clients switch to Paylocity. In addition to the expansion of our product suite, which has driven an 80% increase in PEPY since our IPO in 2014, we continue to develop features that are driving increased utilization and engagement by our clients and their employees. Just in this past quarter, our clients have posted over 100,000 jobs through our recruiting module and received nearly 1 million applications, resulting in more than 100,000 employees using our onboarding module. Broader usage on our platform also continues to increase with millions of interactions on a weekly basis.

Activity on our employee self-service and mobile app includes time and labor punches, sending and receiving impressions from our social recognition module, performance management general entries, survey responses, as well as viewing checks and requesting time-off. The increase in interactions highlight how our clients are using our platform to both automate tasks to improve efficiency and engage with their employees in a variety of ways to create a positive culture. Like our clients, we are using our own platform to create transparency, improve communication and continually gather real-time feedback, all critical elements of a great culture. I'm very proud that we have been named to the 2019 Battery Venture's Highest Rated Cloud Companies list, which is based on employee reviews and ratings on Glassdoor.

Before I pass the call on to Toby to review our results in detail, I would like to thank all of our employees for their hard work and dedication during our busiest quarter of the year.

Toby Williams -- Chief Financial Officer

Thanks, Steve. Before going into our financial results, please note that the following discussion on Q3 of fiscal '19 revenue growth will be in comparison to non-GAAP pro forma results for Q3 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 Q3 was 139.6 million, which is a 25.3% increase from the same period last year.

We continue to be pleased by the consistency we're seeing in our business, with Q3 marking our ninth straight quarter of total revenue growth in the mid-20s. Q3 total recurring revenue was up 25.4% from the same period last year with recurring fees up 22.8% and interest income on client funds up 127.9% primarily as a result of balance increases, increased average interest rates and because we continued to invest a portion of client funds. Our adjusted recurring gross profit was 79.9% and adjusted total gross profit was 75.5% for Q3 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 11.9% of revenue in Q3, and on a dollar basis, our year-over-year investment in total R&D increased by 34.3%. On a non-GAAP basis, sales and marketing expenses were 18.5% of revenue in Q3 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 12.5% of revenue in Q3 versus 13.1% of revenue in Q3 of fiscal '18, and we remain focused on consistently leveraging our G&A expenses. Our adjusted EBITDA was 54.8 million or 39.3% of revenue for the quarter, which exceeded our guidance by 2.3 million at the midpoint.

Briefly covering our GAAP results. For the quarter, gross profit was 99.8 million, operating income was 36.2 million and net income was 28 million. With respect to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of 140 million. From a cash flow perspective, we generated 44.9 million in cash from operating activities in Q3 as compared to 35.2 million for the same period last year.

We remain confident that we will continue to expand free cash flow margins on an annual basis, including in fiscal '19. Finally, I'd like to provide our financial guidance for Q4 and updated guidance for fiscal '19. For the fourth quarter of fiscal 19, total revenue is expected to be in the range of 116.7 to 117.7 million or approximately 22% growth over non-GAAP pro forma fourth quarter fiscal '18 total revenue of 96 million. And adjusted EBITDA is expected to be in the range of 27.3 to 28.3 million.

And for fiscal year 2019, total revenue is expected to be in the range of 464 to 465 million or approximately 25% growth over non-GAAP pro forma fiscal '18 total revenue of 372.1 million. This represents an increase of $5 million from the revenue guidance provided on our February earnings call and an increase of 12.5 million from the initial fiscal '19 revenue guidance we provided last August. And adjusted EBITDA is expected to be in the range of 131.5 to 132.5 million, which represents an increase of 2.5 million to our fiscal '19 adjusted EBITDA guidance. In conclusion, we are pleased with our Q3 results, including the mid-20s revenue growth we've generated over the last nine 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 & Answers:

Operator

[Operator instructions] Our first question comes from Justin Furby with William Blair. Your line is open.

Justin Furby -- William Blair -- Analyst

Thanks guys and great quarter. Steve, just wanted to start with you. You guys have had incredibly consistent results but this quarter feels, I'd say, even a bit better than normal. I think if you look at the recurring fees, you've added something like 30 million sequentially, which is a pretty big jump from the 25 million you added a year ago.

And I'm just wondering if there's anything in particular you'd call out in terms of what drove that outperformance this quarter.

Steve Beauchamp -- Chief Executive Officer

Yeah. I don't think there's any really big callouts. I think it does go back to the consistency. This is definitely a recurring revenue business, and I think we've gotten to a consistent level of execution that's built a little bit into this quarter.

And sales team had a good quarter. As you know, it's an important part of our selling season to be able to onboard all those new customers in January. And so, our implementations team did a great job. And I think from a marketplace perspective, I would say our core market, definitely strong.

We continue to see success at the low end of the marketplace. So that's continued to see that with our core sales force and then the small number of emerging market reps did well in January as well. So I think consistent performance on operations and retention with some strong performance in sales drove the results.

Justin Furby -- William Blair -- Analyst

OK. And I guess as you guys approach a half a billion in revenue and as your competitors continue to scale their businesses as well, can you just take a step back and remind us, I think as a mid-market Ulti runs into Ceridian most of the time. Just give us a sense for down in your space how often you're seeing Paycor or Paycom, those sort of players versus kind of the legacy guys?

Steve Beauchamp -- Chief Executive Officer

Yeah. I mean so think about our segment. On average, our customers have around 100 employees. And obviously, with our emerging markets will go down to very small employers in that under-20 employee segment.

And then our target market goes up to 1,000 employees. And once in a while, we find customers that are great fits above that as well. So that's the market that we go after. And really, there's over 600,000 businesses in that space.

And so you can see from a penetration perspective, there's still a huge opportunity. And really, the big players are ADP and Paychex, who I think both have something like 600,000 businesses in the U.S. that they serve. So those are the primary folks that we run into.

The local and regional players, there's hundreds of payroll companies across the country that really operate in a fairly narrow geography, and that would be the next group of people that we run into. And then I think you get to smaller percentages, you think of people like a Paycom or a Paycor. Obviously, Ulti is a little bit more focused up market so that wouldn't be a smaller percentage in those. But that's the order that it's been like for a long time and it's still the case today.

Justin Furby -- William Blair -- Analyst

OK. Got it. Thanks very much guys. Great quarter.

Operator

Our next question comes from Scott Berg with Needham. Your line is open.

Scott Berg -- Needham and Company -- Analyst

Congrats on the great quarter as well, and thanks for taking my questions. I guess I wanted to follow up, Steve, wanted to start on your sales hiring efforts. Sounded like you're pleased with the progress of them early in the year. But how should we think about those additions in your core segment versus maybe your emerging segment going forward?

Steve Beauchamp -- Chief Executive Officer

Yeah. I think first of all, what I would tell you is our success over next fiscal year and really the next couple of years is going to be driven our success in our core segment. I think emerging markets is still relatively small. It's an area where we definitely have seen success, and we saw success with our core segment selling a little bit smaller client size.

So you saw the increased unit growth last year start to happen. So we love the fact that smaller clients are buying more product. We think that positions us really well. But I think it's really going to be driven by our core segment.

I think what you'll actually see is as emerging market gains some momentum, you won't see it as much in revenue because if you think about it, those clients are going to be maybe one-tenth the size, maybe even a little less than that on an annual revenue basis, but the units will start to pick up a little bit. And so, we definitely saw some of that in the quarter. And so, because of that, you'll see most of our hiring happening in that core segment versus emerging market. And emerging market would then -- as we gain success, will gradually built over time.

And you're right, we are very happy with our progress so far with hiring to date.

Scott Berg -- Needham and Company -- Analyst

Great. And I guess from a follow-up perspective is when you think about scaling our implementation teams, obviously you're adding a lot more customer units today than what you did even a year ago or two years ago. And that doesn't even necessarily take into consideration the smaller units down market in the emerging segment. But can you maybe help us understand how you're scaling implementation efforts? Are there any challenges or maybe new technologies that you feel like you have to bring in to maintain the level of success you've had in this really busy period?

Steve Beauchamp -- Chief Executive Officer

Yeah. No, that's a great question. I think as we anticipated having more success bringing on more units, we really did recast our implementation process for those customers. The great thing about that market segment, they often don't have established processes.

So they're definitely more apt-to-use, kind of, out-of-the-box configurations, best practices that we've built into the platform. And we can get those smaller customers up in a matter of days instead of a matter of several weeks. And so that's something that we benefited from. We launched that realistically over the last 12 months.

We're bringing on customers faster than we've ever done before. We're doing it relatively efficiently because we're able to build these kind of best practices, prebuilt configurations, think about them that way, into the system. And that part has been going very well.

Operator

Our next question comes from Brian Peterson with Raymond James. Your line is open.

Kevin Ruth -- Raymond James -- Analyst

Hi, guys. Kevin here on for Brian. Thanks for taking my call. You've spoken before about looking to grow PEPY into the $400 range but don't see that as any kind of end goal.

Can you just speak to the visibility you have within your product road map that suggests there could be some headroom there? And how would you characterize the balance between launching new modules versus going deeper within existing areas?

Steve Beauchamp -- Chief Executive Officer

Sure. Well, I think our product strategy is really what's enabled our success for many years, and I think that will enable our success going forward. So we need to do both. We need to add new modules and at the same time, we need to learn from our customers' feedback and continually enhance what we have available to them.

And so that's what we are focused on doing. We don't necessarily give you an exact road map because in many cases, we're reacting to our feedback and we're building based on what our customers are telling us. I can tell you the one module we have talked about that will be of out this calendar year will be learning management. We do have customers on our learning management early adopter program today, and we're feeling good about the trajectory of that product.

And so that's probably next up on the list. And I would tell you that we're actively working on things to go beyond $400 per employee per year.

Kevin Ruth -- Raymond James -- Analyst

Got you. And then maybe just at a high-level. Can you give us an update on what you see as priorities for cash generation going forward? I think you've completed the prior repurchase authorization a few quarters ago. How should we think about your cash position going forward?

Toby Williams -- Chief Financial Officer

Yeah. I think we ended the quarter with about 140 million cash on balance sheet, and we continue to look at the uses of cash. I mean I think as we've talked about before, we tend to think about it in terms of what is our ability to use cash to help generate growth. So I mean I think that's top of mind for us as we think about the options for our cash usage and cash planning over time.

Kevin Ruth -- Raymond James -- Analyst

That's very helpful. Thanks.

Operator

Our next question comes from Terry Tillman with SunTrust Robinson Humphrey. Your line is open.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Hey, gentlemen. I'll echo the congrats. Nice job on the quarter. I guess the first quarter is just related to TPA, and I know you've played it down, Steve, in terms of it's just too early how that's going to play out.

But one more quarter into some of the early adopters trying it out and maybe some of your partners and your brokers and folks working with it. Maybe an update on your confidence level of this making a difference as we move into next year and thoughts on attach rate of the product.

Steve Beauchamp -- Chief Executive Officer

Sure. So I think if you go back to our original strategy was to really learn from the knowledge that we acquired in that business and then build a technology offering over top of the TPA product that we bought and really build it right into our mobile app, into our employee self-service platform so that an employee could check on their paycheck, request time-off, but at the same time, look at their account balance before they walk into a pharmacy and need to be able to pay some of the bill and look at all their transactions. So I would tell you that we do have that product in early adopter phase. So we're making good progress on the product strategy.

But we rolled it out to our own company, and I have it available on my phone right now in terms of looking at my own balance. And so I think it's very, very useful. We're starting to really just introduce that to some early adopter brokers as we figure out what our launch strategy is. And that's starting to resonate.

And we have a really strong road map of things that we think we can add over the next 12 to 18 months that's even going to strengthen that portfolio. So, so far so good with the acquisition. But as I indicated before, certainly a little bit of lag before you start to see that having impact. We look at both emerging and our investments in TPA as really having an impact to our revenue growth, call it, two or three years from now versus this year or next year.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

OK. And then just the follow-up question is, I know you're proud of all your products and you love all your children here, meaning all these modules. But if you look at the broader HCM suite and just all the add-on products and if you take a step back and just kind of review, kind of, the state of the business and the success of those add-on products in the last couple of years, what has impressed you the most, and what is the product that you thought you would've seen more from or what could be better?

Steve Beauchamp -- Chief Executive Officer

Sure. I think as an industry, we're kind of moving from simply an efficiency conversation with our clients to really having a higher-level conversation where customers are looking at how do they engage their employees differently, how do they use our platform to really attract talent. So if you start thinking about gathering data about coaching sessions and feedback sessions in our real-time perform generally, you start gathering data around surveys to get a pulse check on how your employees are feeling or what the on-boarding experiences like for new hires. And then as we get through the back half of the year and we start launching something like learning management and we get data around how people are learning and what the problems are the people are trying to solve, you really start to be able to tell a customer not only can we make you very efficient by having your employees interacting with the platform and really reducing administrative burden but I can really help you drive your culture and make it a great place to work.

And we're starting to see some of our clients really use some of these newer product offerings to make that happen. And to me that's really exciting and really opens up a whole opportunity going forward.

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Thank you.

Operator

Our next question comes from Corey Greendale with First Analysis. Your line is open.

Corey Greendale -- First Analysis -- Analyst

Hey, good afternoon. Nice work on the quarter. Steve, in your introductory comments, you talked about investing in the broker channel, which is not surprising, but I was hoping you might elaborate on that. Are you talking about like technology type investments? Like enhancements to the partner portal, or you're talking about investments in kind of managers of those partners? Or can you just elaborate on what you're investing in?

Steve Beauchamp -- Chief Executive Officer

Yeah, sure. So I would say both. So continued investment in the technology platform that our brokers use. So what's available to them in terms of analytics when they come into their partner portal? We're adding different insights that we think they will find valuable about our mutual customers.

So that's something that we continue to do. Secondly, we will continue to add resources to those that are dedicated to partnering with our brokers. And some of those resources might be coordinating programs here, marketing programs. The other side of that could be people in the field that are kind of working with our key brokers.

So that's something that we definitely historically have mostly leaned on our sales force to do, and we think there's an opportunity to do even more with brokers by providing a little bit more support for that channel, both in terms of technology and people.

Corey Greendale -- First Analysis -- Analyst

That makes sense. In terms of that channel, it sounds this has been really fruitful for you. Are you seeing anything competitively in terms of any of your competitors trying to more actively partner with brokers?

Steve Beauchamp -- Chief Executive Officer

I would say it's probably the people that we've usually seen in that marketplace. You don't necessarily see people like ADP and Paychex who have pretty decent insurance-oriented businesses, whether it's in the context of their PEO or direct. You see them sometimes but not a lot. And so, it's probably more of the local and regional and a couple of the growth players like ourselves that you might see in the broker channel.

But I wouldn't say the dynamics have changed.

Corey Greendale -- First Analysis -- Analyst

Thank you.

Operator

Our next question comes from Samad Samana with Jefferies. Your line is open.

Unknown speaker

Hi. Thank you for taking my question. This is Hanubav Mera on for Samad. I guess my first set of questions are around your sub-20 market.

And could you -- like as you've gone deeper into the market and you learned more about the market, could you talk about some of the go-to-market changes that you've made or you're making to drive customer ads from this market compared to maybe rest of your market segments? And similarly, like how do you think like the channel mix is differing and how are you incenting the channel compared to what you would do generally for the rest of the business? And I have a follow-up.

Steve Beauchamp -- Chief Executive Officer

Sure. OK. I think if you look at the low end of our marketplace, we started really seeing increased success probably 18 months ago with our core sales force just selling more clients in that under-50 employee segment. And as we explored it, we realized that these customers were looking for more HCM solutions than what they had looked for in the past, and our solution really resonated with them.

And so, based off the back of that success that we're having with the core sales force, we started to add some resource that would be dedicated to go after this market. We're still early in that process. I think we're happy with the progress of those teams. They're not -- we don't have a lot of resources focused on that.

It's probably not a big revenue driver. But at the same time, our core sales force also continues to have success in that under-50 marketplace. So that trend has continued. The clients at the low end of our market are looking for more HCM products, things like on-boarding, recruiting, very popular in that segment of the marketplace.

And so, we think that trend will continue, and we'll go out at it both with our core sales force who is always focused on the low end of the market but we'll also continue to layer in these emerging market folks. We think that would be a combination of field-based sales reps, as well as reps that we may have centrally located. And it's going to take a little while because you've got to build the channels up over time. We've been in the broker channel now for probably a dozen years, and we've built that up year after year by working and creating the relationships and the structure that's necessary.

And I think we're going to have to do the same things with things like CPAs and banks. So we're pretty early in the cycle on the channel side.

Unknown speaker

OK. That was great. So just to follow up, like this is -- obviously this year, your margins jumped substantially, a lot of that had to do with the ASC 606, but going forward, like if you could give us some directional idea what kind of level of margin expansion should we expect? And on similar lines, if you could give us an idea of level of investment you're thinking of making in R&D and sales and how do you balance that versus margin expansion looking forward?

Steve Beauchamp -- Chief Executive Officer

OK. So we issued a new long-term model. It started this fiscal year taking into account some of the 606 benefits and then, of course, the fact that we were able to achieve the model that we put in place four years ago. And so think about starting to see around 28% adjusted EBITDA, and we've put a long-term target out there that would be 30 to 35%.

It took us four years to get into a long-term model the first time, so we don't have an exact time frame. We're clearly going to prioritize growth first but that gives you kind of a sense at how we thought about it historically and how we think about it going forward. So a more measured, gradual growth in margin, simply because we got so much of that benefit in that onetime lift from 606. And then maybe, Toby, would you want to give some thoughts on the other line item spends?

Toby Williams -- Chief Financial Officer

Yeah. I mean I think what I would say for sales and marketing and R&D is -- those have -- I think we have been pretty consistent around the level of investment there. So for R&D, we've been in that 10 to 15% range and probably even tighter in sort of the 12 to 14%, then sales and marketing has been in the 20 to 25% range both those in -- that's probably even tighter around the 21, 23%. So we haven't been pretty consistent there, and I think that's -- we've called that out in the refreshed long-term model, and I think you'll -- I'd expect to see a level of consistency around that as we go forward.

Steve Beauchamp -- Chief Executive Officer

Right. And lastly, we expect to continue to leverage G&A. So continued improvements in overall gross margin and G&A is probably the primary drivers to get us into that long-term range.

Thank you.

Operator

Our next question comes from Ross MacMillan with RBC Capital Markets. Your line is open.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thanks so much and my congratulations as well. One for Steve and follow-up for Toby. Steve, just on -- obviously the algorithm if you're successful with the merging is going to probably skew toward higher unit growth over time. But leaving aside average customer size, I'm just curious what are you seeing in terms of module attach at that low end, so number of modules per customer relative to your core 100-plus employee market?

Steve Beauchamp -- Chief Executive Officer

Yeah. So what I would say to you is if you look at the average revenue per employee per year, and we're still admittedly early in this, it's not that different than the average revenue per employee per year maybe at the -- our core marketplace. And there's two -- there's a pro and con there, right? A plus and a minus. And the plus is the average price on some of our core offerings can be slightly higher down market on a per employee per year basis.

And then two, the module adoption isn't quite as high. And so, when you net those two things out, what we're seeing early on in that initiative is that we're able to generate a similar per employee per year average revenue in both markets.

Ross MacMillan -- RBC Capital Markets -- Analyst

That's super helpful. And then, Toby, just a follow-up. Your interest income on funds held for client was very strong. And I understand the dynamic of underlying growth in client funds but rates were sequentially lower in this quarter but -- versus the prior quarter.

So is there some, I don't know, some other impact that's impacting that number? Are you laddering slightly further out with a larger fund base? Or how -- what is the kind of driver, if you will, if you could sort of look through the puts and takes?

Toby Williams -- Chief Financial Officer

Yeah. There's -- I mean there's probably a couple of different drivers there, Ross. One is I mean obviously, you've got -- I think we had a little bit more put to work in both buckets than we did before. And then I think the other -- another element that you might see is -- and we've talked about before is, as rates have gone up, you don't get everything immediately.

There's a lag there. And so, you've, I think, two different dynamics to that. One is if there is a rate increase, it's a while before you actually get the rate increase passed through to you. And then another element could be with the bucket that we have invested, as that reinvests over time, you -- we have been in a situation as rates have gone up where as you reinvest you're taking advantage of a higher rate.

But those are the dynamics I can think of that are probably different over the last year or so.

Ross MacMillan -- RBC Capital Markets -- Analyst

I see. So there's a lag just by definition around the, kind of, blocks within -- of capital that are growing and the fact that you're getting these like rebates higher year over year on that higher rate base?

Toby Williams -- Chief Financial Officer

Yeah. That's right.

Ross MacMillan -- RBC Capital Markets -- Analyst

So if we move into a more stable rate environment, that number's going to really grow more at the rate of client fund growth?

Toby Williams -- Chief Financial Officer

Yeah. I think that's largely the right way to think about it, yeah. I think that moderates over time. Yes.

Ross MacMillan -- RBC Capital Markets -- Analyst

Thank you very much. Congrats again.

Operator

Our next question comes from Mark Marcon with R.W. Baird. Your line is open.

Mark Marcon -- Baird -- Analyst

My congratulations as well. With regards to the beginning of the year here where you're typically adding new clients and then also renewing the existing ones, can you talk a little bit about what you're seeing with regards to the client satisfaction rates? Like what's -- how would you characterize the renewal season? It's obviously been great but you do study your clients. What do you -- what's the data telling you about what you've improved materially and learnings that you can further apply?

Steve Beauchamp -- Chief Executive Officer

Yeah. So as you know, Mark, it's a really busy time of year for customers, whether it's bonus runs or adjustments that they have to make at the end of the year. And so we were able to come through year-end with very high response times, which is very, very helpful for customers who are going to call and email much more frequently. And then I think secondly, the other thing that we were able to do really well this year-end is some of the new things that we launched in terms of our knowledge management system, which I mentioned on the call, which really gives clients immediate access to the most obvious questions.

And we've really worked hard to make sure that that's become very comprehensive. So we still want our customers to give us a call, email us, we love that connection with them. It is important to be high-touch. But just having that self-service capability I think has really improved the year-end experience for our customers.

And the last point I would make is the more and more we get product adoption and we get utilization on our platform, the more there's opportunity for these higher-level conversations with customers. So we're able to really drive best practices conversations and not just how do I do this but maybe some other things that they might think about doing to drive either efficiency or engagement with their employees. And so we were able to do more of that this year-end than maybe any other year-end because of efficiencies and because of the utilization in our platform. So overall, great retention through year-end.

Mark Marcon -- Baird -- Analyst

Great. And then with regards to the new clients that you onboarded and sold recently, how would you characterize the level of module adoption relative to, say, the same time period a year ago? How -- obviously, you're doing more but I'm wondering if you can just get a little more granular in terms of like perhaps number of modules or pickup rate in terms of the attach rates, things of that nature.

Steve Beauchamp -- Chief Executive Officer

Yeah. I think we've been -- the way we typically look at is what is that per employee per year price point that people come on, and that's really reflective of the modules that they're buying and the adoption that we have. And I think we've had pretty good, consistent growth in that per employee per year rate of new customers purchasing. And I think it's been somewhat consistent.

If we look at it over the last several years, it's has been growing really nicely. Our new modules we've launched over the last two years has allowed us to keep that growing. We think we've got some stuff in the pipeline that will allow us to continue to do that. We've also had success with the low end of the market.

So we've had more units that may be a slightly smaller size but they're still buying up a lot of our products and modules and we're getting great attachment. I think I would highlight the modules that we've released in the last two years. Recruiting's been a real great success for us. Expense management attached at a nice rate, well into the range that we would expect with any module.

Compensation and surveys are a little bit newer and -- but are on a nice trajectory.

Mark Marcon -- Baird -- Analyst

Great. And then with regards to -- I know emerging's new but -- and we're still learning there, but any sort of characteristics of the new clients in the emerging side just in terms of like where they're coming from? Are there any consistencies that you're seeing? And relative to particularly comparing and contrasting to when it used to be Paychex and what you ended up seeing there?

Steve Beauchamp -- Chief Executive Officer

Yeah. Well, I think down market, you definitely need a user who wants to be as efficient as possible and want to automate as many of their processes and really want to kind of engage with their employees in a different fashion. So believe it or not, I think there are still a number of people that want to call on their payrolls. And so that's probably not our target market.

We're really focused on software-centric users that really want to drive a different experience with their employers. And so, there is a level of user that probably is a little bit more attracted to our HCM capabilities versus somebody who simply just wants to get payroll done. And so, I think that's one of the reasons that we're being successful is that that trend is increasing, and it is a competitive market and those are definitely looking for a different kind of HCM platform that's much more modern, and that's where we really resonate.

Mark Marcon -- Baird -- Analyst

Great. And then one last one. Just -- you did comment with regards to where the long-term margin target is and what the drivers are going to be but just from a cadence perspective, you ended up doing better than what we expected this year with this, and we obviously factored in 606. Just how should we think about this -- you did mention moderate cadence so just in terms of setting expectations? What does that mean?

Steve Beauchamp -- Chief Executive Officer

Yeah. Here's what I would tell you. I mean we're going to invest -- growth's going to be our No. 1 priority.

We want to continue to deliver 20%-plus growth, that's part of our long-term model. And obviously, we've been in the mid-20s now for, call it, the past two years, really in terms of the number of quarters we've been able to do that. So if we see some growth opportunities, we'll take those growth opportunities. And we'll do that in a way that still typically will allow us over a number of years to get into the long-term range.

It may not be a straight line, we might get there with a little bit more margin expansion, a little bit less. But be clear, investing in growth is our No. 1 priority.

Mark Marcon -- Baird -- Analyst

Got it. Congratulations.

Operator

[Operator instructions] Our next question comes from Brad Reback with Stifel. Your line is open.

Brad Reback -- Stifel Financial Corp. -- Analyst

Steve, as you're beginning to have some success down market here, are you seeing any appreciable differences in getting those customers onboarded up and running from a cost perspective?

Steve Beauchamp -- Chief Executive Officer

Thanks very much.Yes. I would say cost perspective is fairly similar. It's -- we definitely do it much faster. And we need to do it much faster because they don't necessarily have the time or resources to go through a multi-week process.

We get them up and running in days, and then we really try to drive utilization of the platform more and more overtime. So I would say very similar, kind of, cost structure. I don't think there's anything meaningfully different to call out.

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much.

Operator

Our next question comes from Nandan Amladi with Guggenheim Partners. Your line is open.

Nandan Amladi -- Guggenheim Partners -- Analyst

Good afternoon. Thanks for taking my question. So Steve, the employment backdrop has been really, really good for the last couple of years, and across HCM, I think most providers have done really well. I'm just curious if you look at -- if you break down the growth from just new customers versus existing customers adding new employees and new headcount, how would you characterize that mix trending over the past two years or so?

Steve Beauchamp -- Chief Executive Officer

I would say over the last two or three years, we've been kind of in the slower growth economy. And so our customers are adding employees to the platform at a relatively slow and consistent rate. It is helpful though. It's a slight tailwind I think is the way that I would kind of characterize it.

But it's in the very low single digits kind of percentage basis so when you're growing 25%, it's not really a core driver, it's just incrementally helpful.

Nandan Amladi -- Guggenheim Partners -- Analyst

OK. And then on the recruiting module that you talked about, how does your recruiting module play with the large recruiting networks that out there like ZipRecruiter and iCIMS and Indeed and so on?

Steve Beauchamp -- Chief Executive Officer

Yeah. So I think about the question maybe in two different ways. I think we're giving our clients the ability to access candidates where they are. So an example of that would be really integrating with Indeed.

Indeed is probably the platform that we would get -- that our candidates are hiring from the most. But we have the ability to integrate with a whole bunch of different candidate platforms where customers -- our customers can then get applications from those platforms. And so we've got the ability to do that. I think the ease of our platform and the integration into the rest of the suite is really powerful and probably the thing that resonates the most with our customers.

Nandan Amladi -- Guggenheim Partners -- Analyst

Thank you.

Operator

Our next question comes from Shankar Subramaniam with Bank of America Merrill Lynch. Your line is open.

Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst

Thanks, and congrats on the results. So just to summarize on the emerging market, it seems like you're getting similar revenue per user in the -- in that segment versus the core. But if I want to talk about the lifetime value of a customer in the core -- in the emerging market versus the core and talk about the LTV to CAC, how would you compare both? And do you see them kind of be the same over a long period of time? And where is it right now? And so, we can kind of figure out, is that -- is it going to be an improvement or is it going to be the same over a long period of time.

Steve Beauchamp -- Chief Executive Officer

Yeah. So I think the first thing to think about is we have been selling in that market for a long time. So built into our existing cost structure is selling a certain number of smaller customers. And our core sales force will be a driver of a lot of those smaller customers on a go-forward basis.

Emerging will then gradually grow. We'll then be able to monitor what that cost of acquisition looks like in the emerging marketplace and decide do we want to do more for it or do we want to lean on our core sales force more to be able to drive that growth. I think our thesis overall, from a long-term perspective, we expect to be able to drive very similar results and understanding these different dynamics. We understand that those clients will actually go to business a little bit more, so you've got to be a little bit more efficient on either both the cost of sales and your gross margin implementation.

And we think we've got experience in this business in the past. We know what that looks like, and we think over the long term, it can be very similar to our core business at scale.

Operator

And I'm currently showing no further question at this time I'll turn the call back over to Steve Beauchamp for closing remarks.

Steve Beauchamp -- Chief Executive Officer

Great. Well I'd like to thank all of you for your interest in Paylocity and just take another opportunity to thank all of our employees for all their hard work over a very busy year-end. Everyone, have a great night.

Operator

[Operator signoff]

Duration: 44 minutes

Call participants:

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

Steve Beauchamp -- Chief Executive Officer

Toby Williams -- Chief Financial Officer

Justin Furby -- William Blair -- Analyst

Scott Berg -- Needham and Company -- Analyst

Kevin Ruth -- Raymond James -- Analyst

Terry Tillman -- SunTrust Robinson Humphrey -- Analyst

Corey Greendale -- First Analysis -- Analyst

Unknown speaker

Ross MacMillan -- RBC Capital Markets -- Analyst

Mark Marcon -- Baird -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

Nandan Amladi -- Guggenheim Partners -- Analyst

Shankar Subramaniam -- Bank of America Merrill Lynch -- Analyst

More PCTY analysis

All earnings call transcripts