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Paylocity Holding (NASDAQ:PCTY)
Q2 2020 Earnings Call
Feb 04, 2020, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Ryan Glenn

Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal-year 2020, which ended on December 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 for our upcoming conference schedule, Steve will attend the JMP technology conference in San Francisco on February 24. Toby and I will be attending the Raymond James institutional investors conference in Orlando on March 3, and I will be attending the RBC one-on-one software conference in New York on March 12. 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 second-quarter fiscal 2020 earnings call. Our strong and consistent revenue growth continued in the second quarter, led by recurring and other revenue growth of 24.6%. We had another very strong sales quarter throughout our target market, and we're pleased to be able to raise fiscal '20 total revenue guidance by $5 million despite the headwind of three interest rate cuts since July. We continue to invest in sales and marketing initiatives to drive growth.

And through the first half of the fiscal year, our sales team is off to their best start in quite some time. Similar to last year, we continue to see unit strength coming from clients with under 50 employees, as well as healthy momentum in the core and upper end of our market. Channel referrals once again represented more than 25% of new business for the second quarter. Adjusted EBITDA for the second quarter was $30.3 million or 22.9% margin, and we continue to drive leverage in gross margin and G&A costs, while we remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal '20 to drive growth.

Our sustained investment in product development continues to pay dividends in the marketplace with our product suite being a differentiator versus our competition. We continue to receive strong feedback on Community, our employee-focused social communication platform designed for clients to increase employee connection, engagement and productivity. Monthly average users continue to increase, and clients have found Community helpful in communicating to their employees on a wide variety of topics, such as benefit, open enrollment and company events. More than half of our clients using Community have also taken advantage of our group's feature in order to increase collaboration and drive cultural initiatives.

In addition, we've been very pleased with the utilization of Community by our clients' employees with more than 15,000 posts and over 100,000 reactions to content just in this last quarter. Our commitment to providing innovative software like Community and on-demand pay that appeals to the modern workforce is also evident in our adoption toolkit, which continue to gain traction with prospects and existing clients. The toolkits help clients adopt, enroll at our solutions, understand common use cases and drive employee engagement across the platform. Our adoption toolkits provide clients with everything they need to plan, configure and launch our products, including instructional videos and expert guidance on product utilization, best practices and product rollout strategies.

The positive feedback we receive from prospects and clients continues to be confirmed by third-party research as Paylocity has once again been named an overall leader in 10 product categories in G2's Winter 2020 Grid Report, including being named a leader in payroll for the enterprise segment for the first time. The second fiscal quarter is a very busy time of year for our operations employees as they work closely with clients on year-end processing of payrolls, W-2s, 1095 and annual tax form filing to 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 the year. I would now like to pass the call to Toby to review the quarter's results in detail and provide updated guidance.

Toby Williams -- Chief Financial Officer

Thanks, Steve. Total revenue for Q2 was $132.4 million, an increase of 23.4%, with recurring and other revenues, up 24.6% from the same period last year. As Steve noted, our sales team had another strong quarter, and we're pleased with the consistency of our performance, specifically the growth we're seeing in recurring and other revenues in both Q1 and Q2, offsetting some of the headwind of three interest rate cuts since July. Our adjusted gross profit was 70.3% for Q2, an increase of 50 basis points from the same period in the prior year, as we continue to focus on driving scale in our business model while also adding operational resources to handle the increased client volume resulting from a strong start by our sales force in fiscal '20.

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 14.4% of revenue in Q2. And on a dollar basis, our year-over-year investment in total R&D increased by 20.9%.

On a non-GAAP basis, sales and marketing expenses were 25.6% of revenue in Q2, reflecting the strength of the sales performance in the first half of fiscal '20. On a non-GAAP basis, G&A costs were 14.9% of revenue in Q2 versus 15.7% in Q2 of last fiscal year, an 80-basis-point improvement, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Adjusted EBITDA for the second quarter was $30.3 million or 22.9% margin as compared to our guidance of $30 million to $31 million. While we are pleased to deliver in the range and continue to focus on driving leverage, we did see margin headwind in the quarter from the lower interest rate environment and from higher sales expenses associated with our strong sales performance.

Covering our GAAP results. For the quarter, gross profit was $87 million. Operating income was $6.1 million, and net income was $5.5 million. In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $152.4 million, and we generated $27.8 million in cash from operating activities in Q2 as compared to $27 million for the same period last year.

Finally, I'd like to provide our financial guidance for Q3 and updated guidance for fiscal '20. For the third quarter of fiscal '20, total revenue is expected to be in the range of $168.5 million to $169.5 million or approximately 21% growth over third quarter of fiscal '19 total revenue. And adjusted EBITDA is expected to be in the range of $63.8 million to $64.8 million. And for full fiscal year '20, total revenue is expected to be in the range of $572.5 million to $573.5 million or approximately 23% growth over fiscal '19 total revenue.

And adjusted EBITDA is expected to be in the range of $163.5 million to $165.5 million. In conclusion, we are pleased with our Q2 results, including our consistent revenue growth, particularly in recurring and other revenue, as well as our ability to continuously demonstrate scale in our business in both gross margin and G&A, and we continue to focus on making progress toward our long-term financial targets. Operator, we're now ready for questions. Thank you.

Questions & Answers:


Operator

[Operator instructions] And our first question comes from Scott Berg with Needham. Your line is open.

Scott Berg -- Needham and Company -- Analyst

Hi. Steve and Toby, congrats on good quarter. I guess, Steve, let's -- yes, let's just expand upon some of the sales successes that you said in the quarter. You said your sales teams were off to the best start ever.

It sounds like your move down markets having some fruition. Are you seeing any changes in the environment? And I guess, in terms of demand trends, what customers are asking for, maybe modules? Or is it just kind of strong productivity across your sales force?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think, overall, a lot of the enhancements that we've made to the product over the last several years, including new modules and feature adds, we definitely are seeing great reception in the market for those additions. I mentioned Community in the prepared remarks is a highlight for us in terms of both differentiation and utilization. And I think the other thing I would say is the strength in the sales force in the first six months of the year really is across the board, so continued strength in units, below the 50-employee mark.

Our core mid-market offering has done really well and at the top end of our target market. We've done well. And so when you put all that together, it's definitely the best start we've had in a number of years.

Scott Berg -- Needham and Company -- Analyst

Great, helpful. And then, Toby, on the margin guidance for the year, you raised revenue. You kept your EBITDA -- adjusted EBITDA on an absolute basis flat, though, from your prior guidance. How should we think about that delta? Are you spending in a couple of areas or maybe being conservative around interest rate changes?

Toby Williams -- Chief Financial Officer

Yes. It's probably a little bit of both, Scott. I mean, I think we're definitely seeing it from a sales expense standpoint, which is a result of the sales performance that Steve was just talking about, which I think we're really happy with. And then, obviously, we've had the headwind from the three rate cuts since July which have had an impact, both from a revenue standpoint but also from an adjusted EBITDA perspective.

So I think those are the two main points. And I think, overall, I mean, to be able to raise from a revenue standpoint and sort of keep the guide from an adjusted EBITDA perspective, overall, feels pretty good.

Scott Berg -- Needham and Company -- Analyst

So at the moment I'll jump back in the queue. Thanks.

Toby Williams -- Chief Financial Officer

Thanks.

Operator

Thank you. Our next question comes from Terry Tillman with SunTrust. Your line is open.

Nick Negulic -- SunTrust Robinson Humphrey -- Analyst

Hey. Sorry, guys. It's actually Nick on for Terry. So first one was around R&D.

So I guess, how should we think about R&D investment moving forward? I mean, should we expect further increases in PEPY? In the near term, are you focusing more area on the current products?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think we have opportunities to both. So we are definitely seeing increased penetration of a number of modules that we've released over the last several years, and that certainly helps us from a realized PEPY that we're getting across our clients. At the same time, we've got an inside sales team really selling those products back to current clients, so we're getting a little bit of a lift there.

It's not a huge part of our new business revenue, but it gets bigger and bigger every single year. And then lastly, we do think that we'll continue to be able to add modules over time that we're going to be able to monetize. And so the ability for us to continue to drive new product innovation, both from a feature set and new modules, is definitely part of our long-term plan. And we believe that the range for R&D, when you expense and capitalize, is really 10% to 15%.

We've been solidly in that range for a number of years, and I think we would continue to look at that same type of investment on a go-forward basis.

Nick Negulic -- SunTrust Robinson Humphrey -- Analyst

Got it. OK. That's helpful. And then just a follow-up.

So I guess, any updates on -- and you touched on Community in the prepared remarks. But on, I guess, attach rates or usage across the customer base for Community or data insights, I know you mentioned around 50% of customers are using data insights at the user conference. I guess, just any update you have there would be helpful.

Steve Beauchamp -- Chief Executive Officer

Yes. So we definitely are seeing increased overall client utilization in our data insights module, which comes with any purchase, so it's not a separate purchase. And we have been driving new and different analytics for those customers to be able to benefit from that. We've got a utilization dashboard that customers can use and see exactly what employees are doing and how that translates to both saving the clients' time and driving higher levels of engagement is probably the newest analytics that we've added to the platform.

And then Community, we've rolled out -- we've completed the rollout in the fall. We've been really happy with the uptake of that feature. It really drives a lot of employee engagement, unlock some pretty interesting use cases for our customers. And I think I've said in the past, when we introduced a new module like that, we really look to try to get 10% or 20% of our customers on that module within a reasonable period of time.

And I think we're on pace or even ahead of where I would have expected with Community.

Nick Negulic -- SunTrust Robinson Humphrey -- Analyst

Got. OK. Thank you.

Operator

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

Pat Walravens -- JMP Securities -- Analyst

Oh, great. Thank you, and congratulations, guys. I want to talk a little bit about how big this business can get. And you have some slides in your deck that are really helpful a lot, but I'm going to drill down just a little bit.

So you've got 20,000 customers roughly, right, Steve, and there's 600,000 in your target market?

Steve Beauchamp -- Chief Executive Officer

That's correct.

Pat Walravens -- JMP Securities -- Analyst

Like when you take it off, 600,000, right, I mean, how -- so how many of those are really up for grabs? Is this something where you can -- what sort of market share can you eventually end up with?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think a couple of things. There's 600,000, our core market of 20 to 1,000 employees. As you said, at the end of last fiscal year, we had a little more than 20,000.

And I think our viewpoint is we're trying to continue to grow the business at above 20% per year increasingly. So that's coming from units as we saw last year, which was over 20%. And so the idea of every -- between three and four years at that metric, you can end up doubling the business. And so if you think of that and 20,000 clients being 60,000 clients, that's still just 10% market share.

And so we look at that as -- within a reasonable time frame, when you look at kind of our long-term model, that that's something that we're kind of executing toward based off last year's metrics, and we're going to kind of stay focused on that. And we think there's room beyond that, but that's a great near-term target. Let's think of doubling the business and getting to $1 billion and beyond as our next big milestone.

Pat Walravens -- JMP Securities -- Analyst

All right. Awesome. And then just sort of a follow-up on that as you also have a great slide on the competitive landscape. But one that sort of came across my radar recently, and I don't see on here, do you run into Paycor, is that a competitor?

Steve Beauchamp -- Chief Executive Officer

Yes. I think we would characterize Paycor as being one of the largest privately held companies that we see. So a lot of the privately held companies are smaller companies, operate in a very narrow geography, and I think Paycor would definitely be much larger than that. And so we would kind of put that still at this point in time, that local or regional.

And that's not saying anything about Paycor. They're a tough competitor. We see them fairly often but not enough to necessarily call out specifically.

Pat Walravens -- JMP Securities -- Analyst

OK, perfect. Thank you very much. Congratulations again.

Operator

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

Brad Reback -- Stifel Financial Corp. -- Analyst

Great. Thanks very much. Steve, if you think forward, given the amount of engagement that you're seeing with the community product, does that fundamentally change the type of solutions you can put into your customer base going forward?

Steve Beauchamp -- Chief Executive Officer

Sure. So one of the ways that we think about it is we're really trying to add value in three different ways for our customers, and one is we're really trying to save them time and really digitize the entire HR back office. And so that does create a lot of interactions and a lot of transactions, and it drives a lot of utilization on our platform. So we look at daily users and weekly users and monthly users, and we see that increasing base of the transactions.

Secondly, what we're trying to do is find more engaging use cases that aren't just automation of transaction. So you think about our survey product, you think about performance management and journal capability, reward and recognition with impressions and Community, which creates a whole other level of engagement. And we take all of that data from both these engagement-oriented products and transactional products, and then we combine that to deliver interesting insights back to our clients. And we do think that that data that we have about the employee and the frequency of which they engage, certainly opens up interesting product opportunities on a go-forward basis that likely surround that workforce.

But that might be a little bit different than what we would have thought of maybe three or four years ago.

Operator

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

Mark Marcon -- Baird -- Analyst

Great. Thanks very much, Steve. Wondering what are the implications of the strong G2 scores, particularly in the upmarket. Does that represent a new opportunity? You're clearly doing really well from that perspective, so just wondering what the plans are to capitalize on that.

Steve Beauchamp -- Chief Executive Officer

Yes. I think we're really proud of those G2 scores overall, and I think it reflects our focus on a strong client experience that we're ultimately delivering. We've been consistently delivering over 92% revenue retention as a proof point. And I think mobilizing our customers that advocate has been really, really positive for us.

I'm not so sure that I would look at the first time winning the enterprise is unlocking some brand-new potential. I think it probably speaks to the success that we're actually having in that market. I think it's important to mention that the strength in the sales force has really come across all segments. And that 500-plus, 500 to 1,000, and sometimes it goes a little beyond the 1,000, has been a really strong start to us.

And I think it's just another proof point.

Mark Marcon -- Baird -- Analyst

That's great. And then, Toby, with regards to the guidance, how are you thinking about float balance growth and effective yield and how that compares and contrasts relative to last year?

Toby Williams -- Chief Financial Officer

Yes. So I mean, obviously, we've seen -- we have seen three rate cuts since July, and that's certainly a headwind, as I said, both from a revenue and from an adjusted EBITDA perspective as that flows through. And I think there is -- there will be continued flow-through. We've seen the impacts in Q1, Q2.

There will be continued flow-through into Q3 and 4. And so I mean, I think directionally, you'll see that come through, even though we have average daily balances are up from around 1.1 to 1.3 in Q2. You'll continue to see that impact flow through into Q3 and Q4.

Mark Marcon -- Baird -- Analyst

OK, great. And then with regards to the deferred contract cost on the free cash flow, how should we think about that as the year unfolds?

Toby Williams -- Chief Financial Officer

So I think what you see there is some of the proof point of the sales force execution that Steve was talking about. So we have seen strength in Q1 and Q2. And if you look at Q1 and Q2 performance of this year versus prior years, I mean, that's one of the areas where you start to see the impact of that. I think it references the strength of the sales performance in the first half so far and in Q2.

Mark Marcon -- Baird -- Analyst

Terrific. I'll follow up offline. Thank you.

Operator

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

Samad Samana -- Jefferies -- Analyst

Thanks for taking my questions. So maybe, first, I just wanted to, Toby, on the sales and marketing expense side, just for clarity, that's driven by more commissions because sales were stronger than expected. Any change on the customer acquisition cost side, if we just kind of held it like for like in similar-sized deals?

Toby Williams -- Chief Financial Officer

No. I mean, I think what you're seeing in the sales and marketing cost -- so if we take a step back, I mean, we've talked about incremental investments in sales and marketing over the course of, call it, the last year or so. And so I think you're just seeing some incremental investment there, but I think you're also seeing the other significant part of it is the incremental sales expense from the sales performance in the course of the year and in the quarter.

Steve Beauchamp -- Chief Executive Officer

Yes. And I think just to add to that, if you compare that line item to last year at this time, we would say the incremental percentage of spend is largely driven by sales performance, staffing levels in the sales organization directly related to our producers. The marketing initiatives we think are relatively small. We're excited about some of the things that we're doing with channels and marketing, but most of that is really coming from our sales organization performance.

Samad Samana -- Jefferies -- Analyst

OK, great. And then maybe one for you, Steve. As you think about competitive dynamics, any changing in pricing behavior or discounting behavior some of your larger competitors have not had such great quarters. So I'm just curious if you're seeing any change in behavior.

I know price isn't the No. 1 factor, but it certainly is something that we get asked about.

Steve Beauchamp -- Chief Executive Officer

Yes, yes. So I definitely don't think price is the No. 1 factor, but you're right. It's a competitive market, and we're used to a highly competitive market, and we really have not seen any changes to those dynamics.

At the end of the day, it's really the strength of our product and the service offering that we can provide those customers to kind of unlock the value that we're giving them is really probably more important than price, and we haven't seen any abnormal behavior from a pricing perspective.

Samad Samana -- Jefferies -- Analyst

Great. Appreciate you taking my questions. Thanks, guys.

Operator

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

Alex Sklar -- Raymond James -- Analyst

Thanks. This is Alex Sklar for Brian. Steve, I just want to follow up on the sales momentum comments. Can you just elaborate on what metrics that might be on? Is it simply just new customer growth? Or are you also seeing momentum on larger initial deal size or upsell as well?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think if you look at new business revenue is how the sales organization is compensated. So new annual recurring revenue is really where we're talking about seeing that strength. And last year, we saw a lot of strength in units under 50, and so I would say that has continued into this year.

And we've seen even better strength in our mid and upper end of our marketplace. And so if I were to characterize last year versus this year, last year, we had a good year from a sales perspective. It's been even better in that mid-market and upper end with continued strength down market.

Alex Sklar -- Raymond James -- Analyst

Got it. And, Toby, I know this has come up on some prior calls, but I just wanted to ask about the higher percentage of cash being used for corporate investments this quarter. I'd say the commentary in the prior calls is more so tied to a higher percentage of client funds being invested. So just wanted to ask about that.

Toby Williams -- Chief Financial Officer

Yes. So we do both. We have a portion of funds held for clients that we're investing, and we also have a portion of corporate cash that we're investing as well, similar from a portfolio standpoint, but we're investing a piece of each. And I think that just on the corporate cash piece, just sort of reflects nothing more or less than responsible placement of cash from the balance sheet.

Alex Sklar -- Raymond James -- Analyst

Thank you.

Operator

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

Nandan Amladi -- Guggenheim Partners -- Analyst

Thank you. Good afternoon, and thanks for taking my question. A competitive question here. The traditional service bureaus have also reported improving retention rates over the last couple of quarters despite having some pricing actions as well.

I'm wondering how much of a function this is of a healthy economic backdrop overall relative to any competitive sort of displacements and things like that. What are you seeing from your vantage point?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think the way we see the economy manifest in our client base is how many employees are being paid and how many active employees that they have, and I would say we haven't seen any change to what that run rate looks like. So that has been kind of a slow-growth environment for a while, and that continues to look that way. So I don't think that's necessarily a factor for us because it hasn't changed.

And secondly, we don't sell a whole bunch of new businesses. So that's not a key part of what we do. It's sometimes you see with economy increasing more new business formation. So I don't think the economy in itself has been really helpful or hurtful to us.

The biggest impact has really just been the interest rate declines, and then, of course, our own performance in terms of driving that. Acceleration that you see in recurring revenue, these first two quarters of this fiscal year versus the last two quarters of last fiscal year.

Nandan Amladi -- Guggenheim Partners -- Analyst

Right. And a quick follow-up on the operational side. I know you talked about adoption tools for customers to begin to adopt some of your newer features. How about on the onboarding side, how automated is that process? And how much opportunity is there for you to make that perhaps more efficient?

Steve Beauchamp -- Chief Executive Officer

Yes. So onboarding has been a great product for us. We've had it in the market now for a number of years, and we've got a significant portion of our customers that are completely digitized the onboarding process using our platform. So you could imagine that prior to starting the first job, you'll go online.

You'll fill out all the information, fill out your required federal and state forms, and you can include some content in there, some welcoming content from the company and then be able to show up to work and not necessarily have to go through whatever, a couple, two or three hours of paperwork like you normally would. And so that's been a really great product for us. It's one of those products that we've even seen get adopted at the lower end of our market more than we would have expected, so we feel good about it.

Nandan Amladi -- Guggenheim Partners -- Analyst

All right.

Operator

Thank you. Our next question comes from Matt Pfau with William Blair. Your line is open.

Matt Pfau -- William Blair -- Analyst

Hey, guys. Thanks for taking my questions. I wanted to ask on the sub-50 employee market. How is the effort to build out or partner with additional businesses in that area to help you generate customer leads progressing? And then also, as you put some more focus on the sub-50 market, have you seen any competitive response from companies that -- where that's more of the target market?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think on the first part, if you look at our channel strategy, which is more than 25% of our new business revenue comes from brokers, brokers do refer us fairly frequently under 50 employees. So it's not a new market for us. It's one that we're seeing opportunity, and we're expanding into.

We are creating more relationships with CPAs who are often operating. And I think we believe that that does take a while to be able to get a client referral that show that you do a great job, get another referral and build that relationship over time. And we are gradually doing that. And I think you see that in the unit success that we were able to drive last year at over 20%, so we're really happy with the progress that we're making.

We think it's really more about expanding our channel approach than some sort of new – brand-new channel approach to be able to continue to success in that under-50 market.

Matt Pfau -- William Blair -- Analyst

And then on the competitive side, any response from some of the companies over that their target market as you've had more success there?

Steve Beauchamp -- Chief Executive Officer

Yes. Again, it's not a new market for us, so I think that's an important point. We've always competed in that 20 to 50. Maybe we're seeing more deals in the 10 to 20 than we ever had before as we've kind of accelerated the unit growth down market, but I think it's really mostly for us, the usual competitors that we've always seen.

We might just see them a little bit more as we drive more activity there, but nothing new.

Matt Pfau -- William Blair -- Analyst

Great. Thanks a lot.

Operator

Thank you. Our next question comes from Siti Panigrahi from Mizuho. Your line is open.

Siti Panigrahi -- Mizuho Securities -- Analyst

Thanks for taking my question. Just a follow-up to Nandan's question. You guys mentioned about ADP and Paychex. You get almost 50% of your new clients.

And besides the improvement in the returns, and they talked about seeing strengths on their 50 to 1000, that segment, they talked about that recently. And also, they talk about the new platform HCM as well. I'm wondering, are you seeing any kind of changes or expecting any kind of changes in competitive landscape as they get more aggressive and come up with a new platform?

Toby Williams -- Chief Financial Officer

Sure. So as I go back to the prepared remarks, this has really been -- the last two quarters have been the best two sales quarters that we've had in a number of years, and we continue to have success against what we think is all of our competitors. And just by the fact that ADP and Paychex are the larger ones in the space and we run into them more frequently. And so we continue with that same level of success.

We haven't seen any differences from a competitive landscape. We really feel good about the win rates that we're driving and the sales momentum that we have, so I'm not sure that a small change in retention from some of those big players really affects the size of our opportunity. Go back to 10% market share, 60,000 clients. We got a lot of room before we even get there, so we feel really good about the start we had.

Siti Panigrahi -- Mizuho Securities -- Analyst

Then when you think about growth, you talked about some of the modules getting traction. So how do you see the growth coming from increase in employee within your installed base versus cross-selling new products into the best installed base and versus new logos?

Steve Beauchamp -- Chief Executive Officer

Sure. So first of all, new logos business has always been the biggest driver of our growth. And last year, you saw new logos accelerate to above 20% for kind of the first time in a number of years, and we continue to have momentum in that under-50 marketplace. So that's probably the right way to think about that.

I think in terms of add-on sales, it's something that we're growing faster than maybe our sales force, but it's still relatively small when you look at the total amount of new business revenue. We do think that that's a great opportunity on a go-forward basis, and the fact that our clients are asking for these products and adopting them is a great sign that we're going to be able to continue to do that. And I think the last part of your question was clients adding employees, that's a really small part of our growth rate, so very, very low single-digit percentages in a slow growth economy. And that's been fairly consistent over the last number of years.

Siti Panigrahi -- Mizuho Securities -- Analyst

OK. And then last question. You talked about -- Steve talked about on-demand pay pretty early, still some feedback. I'm wondering if you have any update on that on-demand pay and when are you going to roll out.

Steve Beauchamp -- Chief Executive Officer

So we've had on-demand pay in the market. We rolled it out to customers starting in the fall. We made it available to all of our customers as of January 1, and we definitely have had a number of those customers adopt it. I think what we've always said about on-demand pay is it's a great option for an employee who might get stuck with unexpected expenses and need to be able to get paid that they've already earned available to them and -- but at the end of the day, we haven't seen customers adopt it in mass.

We've seen customers sometimes be a little bit hesitant and kind of want to understand what are the controls that they're going to have in place, which we have a number of. And so I would say it's kind of rolled out slowly to our customers, although any of our 20,000-plus customers could turn that on today and offer that to their employees.

Operator

Thank you. Our next question comes from Daniel Jester with Citi. Your line is open.

Daniel Jester -- Citi -- Analyst

Yes. Thanks for taking my question. I just wanted to go back to free cash flow question a little while ago. And sort of year to date, free cash generation is maybe flattish to down compared to the same period last year.

You talked about the deferred contract cost. But as we go throughout the rest of 2020, is there any other kind of puts and takes to be thinking about in terms of how EBITDA gets converted to cash?

Toby Williams -- Chief Financial Officer

Yes. I mean, I think we've talked about from a measurement of free cash flow perspective is looking at that on an annual basis and continue to drive free cash flow leverage. I mean, if you think back to where we were, we went from basically a 12.9% to 16.3% over the last -- prior fiscal year, and I think we've said we would -- focus was on being able to drive continued free cash flow progress on an annual basis. We're into the range that we've called out, so I think we feel pretty good about that.

And I think we remain focused on being able to drive continued free cash flow leverage on an annual basis. I think you see some timing elements sort of quarter to quarter within the year. But I think if you look at it on an annual basis, that's still how we think about it.

Daniel Jester -- Citi -- Analyst

Got you. That's helpful. And then just on-demand pay, you just commented. Maybe some of your customers are taking a look at it.

I mean, what specific -- can you give any specific examples of some of the reasons why they may not be as fast to adopt or maybe some of the pushback that they have given to you more explicitly?

Toby Williams -- Chief Financial Officer

Sure. I think it comes down to some of the controls that they have in place in terms of their internal processes, so it's definitely something that you see more demand for hourly workers. And if you think about it, I need to make sure that that supervisor has approved the hours that have worked. And I need to feel confident before I advance them that pay, that that pay was actually earned.

A lot of the business processes that clients have are to do that on a weekly basis or on a biweekly basis, depending on their payroll frequency, and that's where they have those double checks. They don't necessarily do that every single day, and that's what they need to think about. If I need to make sure that if that person is asking for an advance that, yes, they were there that day prior and my processes are verified so that the supervisor understands that and signs off of it. And so I think there's this need for hourly workers and demand for hourly workers that does require a customer feeling comfortable that they have the right processes to make that available.

Daniel Jester -- Citi -- Analyst

Thank you.

Operator

Thank you. Our next question comes from Drew Kootman with Cantor Fitzgerald. Your line is open.

Drew Kootman -- Cantor Fitzgerald -- Analyst

Thanks for taking my question. Just one for me, and I wanted to follow up also on-demand pay. So I know the hesitancy from some customers but just curious what the reaction has been from the people that are using it. And any idea on that 10% to 20% penetration, how long that might take? And any impact to revenue or any time frame that you think there could be?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think, overall, when we introduce a new modular product, we think about that as it could be a two- or three-year time frame before you get into that 10% or 20% kind of range. Some products have definitely gone faster than that. A number of products have definitely gone faster than that.

I think on-demand pay is off to a good start. I don't think that we would think that this is going to have any immediate impact short run. There's relatively small fee structure associated with it. You need a whole bunch of volume for it to be material.

It's a nice add-on and great feature to have for -- to differentiate us in the marketplace, but I wouldn't think that it's going to be material in the near term. We believe it's going to take a while for customers to be able to drive that adoption, and it's going to be a little bit more of a slower rollout. From an employee perspective, those that have used it, and by the way, we offer it to all of our employees as well, we've got a great feedback overall. And so you think about the holiday season and depending on when your paycheck falls, I need to be able to doing some gift-giving.

I need some extra cash. You feel like a scenario where somebody runs into some sort of unforecasted expense and they need new tires for their car or something like that. We've heard different examples where they're really kind of advancing themselves. And what it does is it takes the employer out of the conversation to say, "Hey, can you advance me my pay?" They can go on the app.

They can see exactly what they've earned in real time and immediately request that it gets deposited in their bank account. So I think the employee experience that we've delivered has gotten great feedback. I think it's just going to take a little bit of time for customers to roll that out. And from a revenue perspective, therefore, we'll have a fairly minimal impact as we look at the balance of this fiscal year.

Drew Kootman -- Cantor Fitzgerald -- Analyst

Perfect. Thank you.

Operator

Thank you. Our next question comes from Robert Simmons with RBC Capital Markets. Your line is open.

Robert Simmons -- RBC Capital Markets -- Analyst

Hi. Thanks for taking our question. So following up on the earlier questions, I'm sorry for the -- a question on the topic. But can you talk about on-demand pay and how you're offering and approach are differentiated versus what others provide?

Steve Beauchamp -- Chief Executive Officer

Sure. So the way it works from an employee perspective is you log on to your mobile app, which we have significant mobile app utilization. So employees are used to going on there to do a whole bunch of things. They can look at their pay.

They can actually look at how much of their pay for the next payroll period has been earned. So you can see it in real time. So far, I've earned $475. You can actually see it from gross to net with all the taxes and all your deductions taken out.

I mean, you can request whatever amount is available for you to request, and there are some settings that customer can put into to manage that. And then the -- it will be direct deposited into your account, either same day, depending on the time of day or next day. And that's as easy as it is to use.

Robert Simmons -- RBC Capital Markets -- Analyst

And then what is the revenue model actually for you? Is it based on transfer fees or what else?

Steve Beauchamp -- Chief Executive Officer

Yes. So the client has -- the client selects whether they want to offer that as a benefit to their employees and pay a small kind of transactional fee. Whether they want to have that employee pay that small transactional fee, it's up to the customer.

Robert Simmons -- RBC Capital Markets -- Analyst

Got it. Great. Thanks.

Operator

Thank you. Our next question comes from Arvind Ramnani with KeyBanc. Your line is open.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Hey, thanks for taking my question. So my first question is, based on my checks with your core market, certainly, feedback on the product among users, as well as prospective clients, is very positive. Win rates seem to be also very good. But can you talk a little bit about kind of win rates with larger clients? And in particular, if one of your clients gets acquired by a larger employer, how do you all -- how are your win rates in those types of situation?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think one of the things that I've said a couple of times is we've definitely seen strength across the entire market, so we would think about that as below 50, 50 to 500 and then 500-plus. And so that 500 to 1,000 is really the space at the upper end. And again, sometimes those customers are even a little bit larger there.

I would tell you that we feel really good about our retention rates in that space. So the strength of our product as clients' needs change over time. And then secondly, that's been a big piece of the sales story for the first part of the year. So we've had strength in both our core market, as well as that 500-plus.

And so we definitely feel really good about the win rate, and they're part of that contribution to a strong start to the year.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. And then, look, I also think kind of your tone on this call, as well as kind of underlying growth rates, all seem to be very positive. Are there any areas of sort of concern? Or -- I mean, I understand you have some higher cost, but that's certainly offset by a higher sales performance and all of that. But like is there any real area of softness or weakness you're focused on?

Steve Beauchamp -- Chief Executive Officer

No. I mean, I think the challenge for us this year is you've got three interest rate cuts as wind in our face. The last couple of years, we kind of had wind behind our backs, and so I think that puts more pressure on adjusted EBITDA than any other line item. And then you overlay a great start to the year and strong sales performance.

So you see us -- we feel pretty good that we're able to be in our EBITDA range that we're able to maintain that guidance for the year, absorb those rate cuts for the year and then be able to also handle the expense associated with the strong sales start. And so that's really what we're trying to manage through the back half of the year. But I would always say, those are the kind of problems I'd like to have.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. And just last question for me, and I feel I should also ask a question on this on-demand compensation, and we have talked about it offline on quite a bit. But the one topic I want to get clarification is the IRS rules around on-demand pay. Is that clear? Because I know until a few months back, there was lack of clarity on some of the tax implications.

Steve Beauchamp -- Chief Executive Officer

Yes. Sure. I think any time there's change in the way people are working, whether it's the impact of the gig economy and the number of 1099 workers and legislation that you've seen in California around that or on-demand pay and the idea of getting in advance on my pay, there's going to be catch-up from a legislation perspective. We haven't seen a lot of clarity as of yet.

What we're really doing is offering people pay that they've earned, and we're providing them in advance ahead of their regularly scheduled payday before they get there. And so we definitely believe our product gives them a compliant offering based off the current structure. But we monitor that closely, and we feel that if there are changes to it, we could easily adapt.

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Great. Thank you very much, and good luck, with the rest of the year.

Steve Beauchamp -- Chief Executive Officer

Thanks.

Operator

Thank you. Our next question comes from Jeff Van Rhee with Craig-Hallum. Your line is open.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Thanks, guys. One brief one here. I just want to touch -- maybe if you could just touch back on the EvoShare and Compeat relationships, how those have come out of the gate relative to expectations? And any implications for wanting to be more or less aggressive with other similar relationships down the road?

Steve Beauchamp -- Chief Executive Officer

Yes. We talked about it on last call that we really traditionally focused on brokers and financial advisors and generating that 25% plus of our revenue from that channel. And EvoShare partnership, which we've been really happy with the start, is really targeted at the financial advisors and really helps provide the financial advisors differentiation and really integrates our product offerings. The Compeat is definitely something a little bit newer for us, and that's really kind of a software partnership, where you might have either vertical market software or kind of horizontal software offerings that we would then create a much more integrated offering for our mutual customers and then be able to jointly market that.

And so we've been really happy with that one as well. Now none of those are really that material. I think it's more about the concept and the idea that we could create more of this over time, and that that would be a component of how we drive channels to continue to be that 25% plus of our revenue.

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

Very helpful. Thanks.

Operator

Thank you, and I'm showing no further questions in the queue. I'd like to turn the call back to Steve Beauchamp for closing remarks.

Steve Beauchamp -- Chief Executive Officer

Great. Well, I just want to take a brief moment to once again thank all of our employees during the busiest time of the year, and then, of course, thank everybody on the call for your interest in Paylocity. Have a great night.

Operator

[Operator signoff]

Duration: 47 minutes

Call participants:

Ryan Glenn

Steve Beauchamp -- Chief Executive Officer

Toby Williams -- Chief Financial Officer

Scott Berg -- Needham and Company -- Analyst

Nick Negulic -- SunTrust Robinson Humphrey -- Analyst

Pat Walravens -- JMP Securities -- Analyst

Brad Reback -- Stifel Financial Corp. -- Analyst

Mark Marcon -- Baird -- Analyst

Samad Samana -- Jefferies -- Analyst

Alex Sklar -- Raymond James -- Analyst

Nandan Amladi -- Guggenheim Partners -- Analyst

Matt Pfau -- William Blair -- Analyst

Siti Panigrahi -- Mizuho Securities -- Analyst

Daniel Jester -- Citi -- Analyst

Drew Kootman -- Cantor Fitzgerald -- Analyst

Robert Simmons -- RBC Capital Markets -- Analyst

Arvind Ramnani -- KeyBanc Capital Markets -- Analyst

Jeff Van Rhee -- Craig-Hallum Capital Group -- Analyst

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