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Paylocity Holding Corp (NASDAQ:PCTY)
Q3 2021 Earnings Call
May 6, 2021, 5:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Paylocity's Q3 FY 2021 Earnings Conference Call. [Operator Instructions]

I would now like to hand the conference over to Ryan Glenn, Vice President of FP&A and Investor Relations. Please go ahead.

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 2021, which ended on March 31, 2021. 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 measures 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 regard to our upcoming conference schedule, Toby and I will be attending the Needham Technology and Media Conference on May 17. Steve and Toby will be attending the William Blair Growth Conference on June 1. Toby and I will be attending the Cowen Tech Conference on June 3. And Toby will be attending the Baird Global Consumer Technology and Services Conference on June eight and the Stifel Cross Sector Insight Conference on June 10 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 '21 earnings call. Our solid results continued in the third quarter of fiscal '21 with a total revenue of $186.1 million, an increase of 8.4% versus the same quarter last year despite continued COVID-related headwinds. Recurring and other revenue grew by 10.7%, which included a headwind of $3.5 million to $4 million, or approximately 2% of total revenue due to annual W-2 billing as a result of lower employee levels at our clients in 2020. Despite those COVID-related headwinds, we still had a strong selling season and are pleased to have started more business in the quarter than we did in Q3 of last fiscal.

We continue to be pleased with the execution of our sales team throughout the pandemic, including at the upper end of our target market as our modern, comprehensive product suite continues to gain traction with larger clients. Our sales team continues to gain momentum as we anniversary the impact of COVID-19, with both April new business starts and April first-time appointments up substantially over last April as selling conditions continue to improve. We are optimistic about the potential to return to a more normalized sales environment as vaccine rollout continues and state restrictions gradually ease across the U.S. and remain committed to continuing our investment in digital marketing and digital lead generation to support the effectiveness and efficiency of our go-to-market motion.

Additionally, channel referrals, primarily from benefit brokers and financial advisors once again represented more than 25% of new business in Q3, led by increased use of virtual broker connection activities, events, and virtual gatherings that helped us maintain strong channel referral levels. Adjusted EBITDA for the third quarter was $66.9 million, or 36% margin, which exceeded the midpoint of our guidance by $6.4 million. We are pleased with our ability to be efficient with operational and G&A costs, while we remain focused on incremental investments in research and development and sales and marketing initiatives in fiscal '21 and '22 to continue our momentum in product and sales and to position us for driving future growth once we return to a more normalized macro environment.

Our commitment to product development, including sustained investment in R&D, continues to be a key differentiator in the marketplace. Last month, we introduced the Paylocity Modern Workforce Index, or MWI, a proprietary algorithm and index that analyzes scores and tracks a company's progress in delivering a more engaging experience to their employees, with the goal of improving overall employee sentiment, retention, and productivity. MWI uses machine learning algorithms created by our data science team to deliver an MWI score that can be benchmarked versus peer companies in the same industry. We then leverage the data and best practices for more than 25,000 clients to deliver customized recommendations that will improve employee engagement and increase a client MWI score.

An independent research study performed by Deloitte confirmed that companies with the higher MWI scores experienced lower levels of attrition as higher levels of platform utilization drive improved workplace satisfaction and longer employee tenures. As individuals begin to return to the office and as the war for talent accelerates, we believe driving more efficient processes and focusing on employee engagement will be a key priority for businesses, and we remain committed to better servicing our clients across these areas through our expanded product suite. 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 Q3 was $186.1 million, an increase of 8.4%, with recurring and other revenues up 10.7% from the same period last year. Our adjusted gross profit was 73.5% for Q3, with continued pressure from both COVID-19 and interest rate-related headwinds. 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 $22.4 million or 12% of revenue in Q3. On a non-GAAP basis, sales and marketing expenses were 19.4% of revenue in Q3 as we remain focused on making incremental go-to-market investments in fiscal '21 and fiscal '22. On a non-GAAP basis, G&A costs were 11.9% of revenue in Q3 versus 10.7% in Q3 of last fiscal year, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA was $66.9 million or 36% of revenue for the quarter, which exceeded our guidance by $6.4 million at the midpoint. We remain committed to progressing toward our adjusted EBITDA target of 30% to 35% of revenue once we return to a normalized macroeconomic environment. Covering our GAAP results.

For the quarter, gross profit was $128.7 million, operating income was $39.1 million and net income was $36.8 million. In regard to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $182.3 million, and we fully repaid the $100 million drawdown on our revolving credit facility during the quarter. We're pleased with our performance in Q3, which included another strong quarter for our sales team, while also identifying opportunities to demonstrate scale and operational and G&A costs, and we're happy with the progress we've made to that end in Q3.

In regard to client-held funds and interest income, our average daily balance of client funds was $1.9 billion in Q3. We are estimating the average daily balance will be approximately $1.6 billion in Q4, and we assume an average yield of approximately five to 10 basis points in the fourth quarter.

Before reviewing guidance, I'd like to provide some additional context on the current operating environment. As Steve mentioned, we continue to be pleased with the performance of our sales team this fiscal year-to-date and this past quarter. In regards to the ongoing impact of COVID-19, we continued to see last quarter a double-digit impact on recurring revenue growth primarily related to the sustained lower level of client employees on our platform. Within the quarter, while we did not see any improvement in January or February, we did see a notable increase in client workforce levels in March, particularly in the back half of the month, with further improvement during the month of April.

Finally, I'd like to provide our financial guidance for Q4 and full fiscal '21, which incorporates known and some estimated impacts related to COVID-19. In regard to employees per client, our guidance incorporates the improvements we have seen to date, but no further increases during the remainder of the fiscal year. For the fourth quarter of fiscal '21, total revenue is expected to be in the range of $159.5 million to $163.5 million or approximately 22% to 25% growth over fourth quarter fiscal '20 total revenue. And adjusted EBITDA is expected to be in the range of $31.5 million to $34.5 million. And for the full fiscal year '21, total revenue is expected to be in the range of $627.7 million to $631.7 million, or approximately 12% growth over fiscal '20. And adjusted EBITDA is expected to be in the range of $164.3 million to $167.3 million.

In conclusion, we are pleased with our Q3 results, particularly in the context of the current operating environment, and we remain committed to investing in the business to ensure we are well-positioned for a return to a more normalized macroeconomic environment. Operator, we are now ready for questions. Thank you.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from Scott Berg of Needham. Your line is open.

Scott Berg -- Needham -- Analyst

Hey, Steve, Toby, Ryan, congrats on a good quarter, and thanks for taking the questions here. I guess I had a couple here, Steven. On the second-quarter call, you commented on how your customer additions were in line with the additions that the company saw in the back half of '19 for that six-month period. I didn't hear you comment on that metric here on the call, but how should we think about the pace of adds? Were you able to kind of sustain that rate, which I think was up 19.5% roughly year-over-year? Or was there a meaningful change one way or the other to the customer additions?

Steve Beauchamp -- Chief Executive Officer

Yes, Scott. I think being the midpoint of the fiscal year, we wanted to give some color of that, knowing that we had just kind of made it through the January selling season. The fact that we didn't call it out this year -- or this quarter was not because we'd seen a change, more it's really continued. And so we've had really strong, I think, unit growth through the first half of the year, and that ran continued momentum in the quarter.

Scott Berg -- Needham -- Analyst

Got it. And then, Steve, one of your comments was about the strength of your sales on the upper end of your target customer segment. Can you point to a factor or two that might be driving better sales there? I assume that means slightly improved win rates, but is there something about the platform or the service that is really resonating well with customers right now?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think the investments we've made in product, both in terms of modules that we've added, but also some of the innovations that we've added to the platform with products like Community, the addition of Premium Video, we feel like that's really resonating in the marketplace with the COVID backdrop and the fact that so many employees are working remotely. In many cases, some of the larger clients still have enough resources where they're still out there evaluating HCM platforms and looking at it. And so I think it's a combination of, I think the market on the upper end is probably a little bit more robust in terms of the earlier recovery, but more important than that is the fact that our product investments are really resonating.

Scott Berg -- Needham -- Analyst

Got it. And then I'll sneak a quick one in for Toby. Toby, your R&D expense in the quarter was actually down sequentially from Q2, and you didn't spend any more on the capitalized R&D necessarily in the quarter. Any reason for that dynamic? Because that typically doesn't happen seasonally for you.

Toby Williams -- Chief Financial Officer

No. I mean I think you're seeing some timing things from a quarter-to-quarter, year-over-year from that perspective, Scott. I mean, I think what we've said pretty consistently is throughout this fiscal year, and I think this will also be true in the back half and in the last quarter, is we'll be focused on putting incremental investments against both R&D and everything from a go-to-market and sales and marketing perspective to continue to drive future growth. And I think despite timing differences that you may see, that's still where the effort is. And I think as we look at getting back to 20-plus percent growth in Q4 and in the tee up for next year, I think we're still focused on driving R&D and sales and marketing investments to drive future growth.

Scott Berg -- Needham -- Analyst

Great. That is all I have. Congrats again.

Operator

Thank you. Our next question comes from Brian Peterson of Raymond James. Your line is open.

Brian Peterson -- Raymond James -- Analyst

Hey [Indecipherable]. Thanks for taking the question. Good to hear from you, guys. So Toby, it's nice to see the 24% growth guidance for the fourth quarter. I know you just mentioned, maybe the follow-up to Scott's question, that there will be some investments. As we think about that 20% plus growth profile, like is there any framework that you would give us in terms of how to think about the cadence of margins as we're thinking about fiscal year '22 and beyond?

Toby Williams -- Chief Financial Officer

Yes. So I guess, I think the big picture backdrop is we've talked about still being focused on getting into that 30% to 35% range over time. I still think that's the right framework that we would point to. I think we've performed better from a margin perspective as we've gone through the year than maybe we would have thought at the outset. And I think a lot of that -- a lot of that comes from some of the costs that we've been able to manage through the course of this year in the pandemic, so things like T&E being down substantially. And then I think -- but I think the consistency in the investment philosophy and the strategy is to continue to spend on things like R&D and continue to drive investment in sales and marketing to be able to continue to drive future growth. So I think that's still how we're thinking about coming through this year. And I think that will be consistent as we go into next year. I think that investment focus will remain constant.

Steve Beauchamp -- Chief Executive Officer

I think the one thing I would add is we're excited about what we're seeing in the market right now as we're starting to see things return to kind of pre-COVID levels when you look at first-time appointments in the sales force, the number of leads coming in, number of clients we're bringing on. And so we definitely want to invest and take advantage of that opportunity. And last year, there were some constraints with travel and T&E and so many other things. And so we're definitely focused on getting into that mid-20s. You can see us forecasting that for the next quarter, and that's our number one focus. And we definitely want to invest back in sales and marketing. We're certainly at a higher rate than we have over this past year as well as R&D, while at the same time, kind of balancing our long-term EBITDA objective of, over time, getting to that 30-plus percentage. And we think we can do that responsibly.

Brian Peterson -- Raymond James -- Analyst

And Steve, maybe it's too early to ask this question, but if you think about the pipeline and a lot of the early indicators that you're seeing, are there any changes into where the sources of business may come from? I'm just curious kind of how the competitive dynamics may potentially evolve, over time. Thanks, guys.

Steve Beauchamp -- Chief Executive Officer

Yes. So first thing I would say is we have been pretty happy with the sales force. We have absolutely sold more business than we did last year. And -- but it has affected productivity a little bit, right, over this past year. And so we're, over the last couple months in particular, we're starting to see activity levels, the amount of bookings, the amount of appointments all start to get much closer to that pre-COVID level, and that's certainly exciting to us. No big change from a mixed perspective. We made the one call out that we're seeing a little bit more traction at the upper end of our target market, but we're getting the customers from kind of the usual people that we would see and the usual competitors in the market.

Brian Peterson -- Raymond James -- Analyst

Thank you.

Operator

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

Brad Reback -- Stifel -- Analyst

Great. Thanks very much. Guys, if you look at the pace of hiring picking up in April, as you talked about, and you play that through to the installed base returning to where it was pre-COVID on their employment levels, do you think it takes a couple of quarters or a year plus to get back to where they were?

Steve Beauchamp -- Chief Executive Officer

I think we've been hesitant to try to forecast the economic recovery. And so as Toby mentioned in the prepared remarks, we basically took what we saw in April, and then we played that through and incorporated that into our guidance. It is difficult for us to assume anything further out there. Obviously, there's positive news in terms of vaccination rates and the number of cases right now. But I think that's the approach that we'll take. We'll try to give you better color on -- as we give guidance toward next fiscal year in terms of what those set of assumptions are. I think at this point, so far, what we've seen is it's been a very gradual recovery, whether that starts to accelerate or not, it's still probably to be determined in our mind.

Brad Reback -- Stifel -- Analyst

Great. Thanks very much.

Operator

Thank you. Our next question comes from Terry Tillman of Truist. Your line is open.

Terry Tillman -- Truist -- Analyst

Yes. Hey, Steven, thanks for taking my question. I guess thanks for the color, Steve, in terms of the April appointments, up 30%. You're going to get in a habit here. We're going to ask you every month how the appointments are coming along. But maybe pre-pandemic, like what was a good month for appointment growth year-over-year? I'm assuming there was growth every year because you're adding more to your sales capacity, etc. But like what does 30% growth sound like? I mean I know it's better than prior couple of months, I assume. But just a little bit more color around that. And is that -- a lot of that from the upper end of the target market?

Steve Beauchamp -- Chief Executive Officer

So first of all, I don't think we called out a specific number on it being up 30%. So that would actually be low relative to what we saw, but we're not going to call out the numbers specifically. So it was definitely up more than that. And we're seeing it really across the board. So we're seeing it down at the kind of lower end of our target market, which those businesses were obviously very much impacted during COVID. So we're seeing that come back. It's happening a little bit more in the states that are more open. So no surprises there. Midsize has also started to come back. I think throughout COVID, the upper end of the market has probably been the steadiest, and now we're starting to see kind of the mid and lower end of the market really start to come back.

Terry Tillman -- Truist -- Analyst

Yes. I just looked at my notes, you said substantially. Somehow, I made that 30%. So good call out there. But maybe the second part of the question, and then I had a follow-up for Toby is, at the upper end of your target market, what's their propensity right now to buy a plethora of your add-on modules? Are you seeing any changes there? And then I had a follow-up for Toby.

Steve Beauchamp -- Chief Executive Officer

Yes. So I think what's really resonating at the upper end of the market is maybe the complete value proposition, the idea of us being the most modern platform and giving our clients tools to manage, a workforce that's gone through a whole bunch of changes, flexible schedules, people working from home, higher demand for transparency. That value proposition is really resonating. And if you look at our product road map over the last few years, we filled in a lot of the HCM modules.

So we've got much more complete offering and a much more modern capabilities. And so I think that has really translated in terms of both our ability to generate leads in the upper end of the market and then ultimately translate those into close sales. And I think that has gradually improved throughout COVID to the point that it was worth at least us calling it out. But again, we've really -- I got to emphasize, we're starting to see things come back across the entire target market.

Terry Tillman -- Truist -- Analyst

Yes, that's great. And I guess, Toby, and maybe Steve actually mentioned this, but the $3.5 million to $4 million impact, I guess, from the lower employment levels, did you talk about or quantify in 4Q what you expect there? I know it sounds like April was better from an employment standpoint, but did you actually quantify the headwind in 4Q? Thank you.

Toby Williams -- Chief Financial Officer

Yes. I mean -- so I guess what I'd say is I think the $3.5 million to $4 million was in reference to W-2s for Q3. And I think that was the call out for that. But I think in terms of quantifying the employees on the platform as we're looking at Q4, I mean, I think, we didn't call out the quantification of that. I think what Steve's comment was is we started to see improvement, mostly in the back half of March. We did see improvement in April. But we did -- and we carried that through to the guide, but we didn't include any incremental improvement from that point forward. And I think that's consistent with how we've been issuing guidance since the beginning, and that's what we did for Q4 as well.

Terry Tillman -- Truist -- Analyst

Thanks.

Operator

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

Mark Marcon -- Baird -- Analyst

Hey. Good afternoon and thanks for taking my question. Just curious with regards to the modules and the attach rates. Can you talk a little bit more about Community and Premium Video, what you're seeing there? And then separately, obviously, there's all sorts of stories about worker shortages and demand for workers. Wondering if you could talk a little bit about your talent acquisition modules and if you're seeing a big uptick there from a usage perspective, and what else you can do in order to help companies alleviate some of the worker shortages?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think on the first point, we definitely have seen, throughout COVID, increased utilization in Community. Now that's a module that is available for all of our customers and really gives the ability to communicate and connect in ways that mirror how people might communicate in their social lives, and it's very social experience. And so that has continued to grow. We have definitely been pleased with the initial launch of Premium Video, which is available to new customers at the start of this last calendar year. That's done probably better than what we would have expected. And no surprise since people are communicating a lot via video today.

I think the other two that's done really well throughout COVID is learning management, surveys, all of these modules that are about communicating and connecting with your employees in a much more digital fashion has been a consistent trend throughout COVID. And we've been really pleased with it, and we continue to innovate around that idea of really truly being a modern experience for employees. And I think the second part of your question, Mark, was...

Mark Marcon -- Baird -- Analyst

Helping clients basically address the talent shortages that are creeping up across the board. What are you seeing in terms of talent acquisition, attach rates onboard? Anything new that you can do to further help for your clients?

Steve Beauchamp -- Chief Executive Officer

Sure. Well, I think early on in the pandemic, a module like recruiting is probably not quite as in demand as people are downsizing and trying to figure out where their business is. We definitely have seen that return back to kind of our normalized level of penetration rates. We launched text-based features on our recruiting application, so you can connect with candidates via text, which gives you a much higher response rate. That's a really good example of something that we've added to really help our customers, and we'll continue to innovate because I think you're right, as the economy starts to recover, it will become more challenging to be able to find the talented people that you're looking at, especially in growth markets.

Mark Marcon -- Baird -- Analyst

Great. And then just on the upper end, when you're talking about the upper end, are you talking all the way at the tippy top of your range? Or are you talking kind of the midpoint to the upper end? And from who are you winning from? Who are the -- because we've heard, obviously, from the big incumbents that we all know, they've been talking about increases in terms of their retention rates. So I'm wondering how that coincides.

Steve Beauchamp -- Chief Executive Officer

Sure. So we basically do not cap our sales force. It's really about a product fit to the customer. And so we are focused up to 1,000 employees. But in many cases and for many years, we'd bring on customers above 1,000 employees. And so I would say it's really the upper half, so it's 500 plus. And we have customers with several thousand employees, and we have a number of customers with thousands of employees on the platform. And so we've probably seen a little bit more momentum at the upper end of our target market and even beyond than maybe we had seen 12 months ago, and we felt like that was probably worth the call out because that was a particular strength in the quarter.

Mark Marcon -- Baird -- Analyst

Great. And who are you taking away from?

Steve Beauchamp -- Chief Executive Officer

No real big differences there. We continue to see some of the service bureau providers. We continue to see in-house offerings. Once in a while, you run into some players in the enterprise space that we don't typically run into, but it's still fairly infrequent. At the end of the day, I think our product suite offers a level of difference where if we get pretty far in the process, you won't see some of the enterprise folks alongside of us.

Mark Marcon -- Baird -- Analyst

Great. And then just for next year, should we think about things like travel and entertainment really creeping back? In other words, should we expect margin improvement next year? Or is it possible that we're going to -- with the sales additions and maybe some expenses coming back, that maybe we have a lower level of margin expansion next year than normal?

Steve Beauchamp -- Chief Executive Officer

Yes. I think that's a good question. First, we're really excited about continuing to invest and grow. I'm excited about the momentum that we're seeing in the market. And you can see that we have not grown in maybe places like sales and marketing and R&D in a way we would normally would. We had kind of done a pause early in COVID. We've been certainly working at increasing those numbers since then.

We are in investment mode. And at the same time, we're going to be comping a time period where we haven't had a lot of travel, people weren't moving around, they weren't getting together. We want to get our people back together. We don't envision everybody being in the office way. It will be more of a hybrid environment, long-term. But we absolutely think getting people together, driving the culture is absolutely going to happen. So it probably becomes a tougher margin year next year because of that. But from a long-term perspective, it won't really hinder our ability to get to our long-term model, and we think that that's the right type of investment because the opportunity is still very large in front of us.

Mark Marcon -- Baird -- Analyst

Great. Thank you very much.

Operator

Thank you. Our next question comes from Bryan Bergin of Cowen. Your line is open.

Bryan Bergin -- Cowen -- Analyst

Hi, guys. Good afternoon. I wanted to follow up on the employment-related headwinds on the pre-pandemic client base. I'm just trying to understand the magnitude of this improvement that you saw through April. So is it still assumed to be a double-digit headwind to recurring in 4Q? Or does that kind of move into the single digits?

Steve Beauchamp -- Chief Executive Officer

It's definitely moved into the single digits. I'm not sure we want to get into calling it out specifically. There's different elements. It's mostly driven by employees on the platform. I think about it as gradually getting better and slowly moving out of those double digits and then, obviously, being less so into next quarter. That's probably kind of the right way to think about it. You can kind of see it, obviously, in our guide, right? We're back into that mid-20s kind of guide. Obviously, we're anniversary-ing kind of that COVID period. But our anticipation was what we saw through April. We didn't include anything else in terms of the assumptions for the guide, but so far, it's been kind of a slow but steady recovery.

Bryan Bergin -- Cowen -- Analyst

Okay. That's helpful. And then can you give us a sense on where sales headcount stands? And how would you say you're doing in this environment, adding new sales professionals?

Steve Beauchamp -- Chief Executive Officer

Yes. So I think as I mentioned earlier, we had a bit of a pause early last fiscal year just in terms of hiring. And we definitely felt like the sales team was doing well in the COVID environment, and we started to kick that back up. This is really our hiring season that we're in right now. So spring is really where we really do a lot of our hiring so that we can go into next fiscal year with the right number of headcount. We feel pretty good about the progress that we're making. We'll give you more color on the next call in terms of where we're at. But I would say, so far so good.

Bryan Bergin -- Cowen -- Analyst

Thank you.

Operator

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

Samad Samana -- Jefferies -- Analyst

Hi. Good afternoon. Thanks for taking my question. So maybe on the product side, just when I think about the company's last couple of tuck-in acquisitions, could we get an update on maybe just where the back-end integration process there is? And kind of along with that, gross margin, I know it bumps up seasonally in the March quarter, but it was actually quite a bit ahead of what we were looking for. So are we starting to see gross margin gains there as those integrations are completed?

Steve Beauchamp -- Chief Executive Officer

So I think, overall, as customers buy more of the HCM modules, we have historically gotten a lift in gross margin. And so if you think of something like Premium Video, a lot of the work is on the product dev side, less of the work is naturally going to be from a support perspective because once we turn that on for you, you've got video embedded in different parts of the application, and you could start taking advantage of that. It's really easy to use, right? And so that's kind of the goal that we have with a lot of the new modules. And so as module penetration increases, that's certainly going to be one of the primary drivers of gross margin.

We also mentioned we had the pretty good expansion of surveys and learning management throughout COVID. So another good example. And then I think there are some element of -- there is some travel and expense and so on that, we do even in the gross margin line, not nearly as much as you would see in maybe sales and marketing. But there's an element of, from a cost perspective, we certainly didn't take on any additional facilities or anything that we might consider in normal headcount growth environment. So I think there's a little bit of cost-benefit from it, but it's -- most of that is coming from the module penetration of these newer modules.

Samad Samana -- Jefferies -- Analyst

Great. And then as I think about maybe the historical trend between kind of the rack, right PEPY, and kind of realized pricing, as you add more of these modules, are you starting to see kind of better conversion there? Or how should we think about like the effectiveness of the add-on sticking in terms of price uplift or PEPY uplift?

Steve Beauchamp -- Chief Executive Officer

I think what we've historically found is when we release a module, we're pretty confident that with a little bit of time, we can get that thing into 10% of our customers and then grow it from there. And we've had pretty good success being able to do that. And some products will accelerate much faster than others and some take a little bit longer, right?

And so, overall, when I look at all of the modules and how we're doing from a pricing perspective in terms of getting that realized PEPY, it continues to increase we feel pretty good about that. Now at the same time, during COVID, you've got less employees on the platform. So you've got some mitigating circumstances there. But I think from a module penetration and the utilization that we're seeing from clients of those modules on our platform, we're very encouraged.

Samad Samana -- Jefferies -- Analyst

Great. I'm going to apologize in advance for squeezing one more in. I know normally we're down to two. But just as I think about CAC, are we starting to see any changes in trends there? I think that, especially with retention, as somewhat mentioned earlier at some of the incumbents increasing and a fight for adding more units, any changes in your customer acquisition costs that we should be aware of?

Toby Williams -- Chief Financial Officer

Well, I don't think -- Samad, I don't think -- we've been pretty consistent from a retention perspective. And so I mean I think we've seen relatively consistent client retention rates throughout the course of the pandemic. I think that consistency would have continued through Q3. And then I think just go back to the investment comments that I and Steve would have made earlier in the call and in the prepared remarks, I mean, I think we are -- still remain focused on investing in sales and marketing. That's true of this year.

Obviously, Steve's referenced a couple of times, the timing difference in the year in terms of being a little bit lighter because of pauses at this point last year. But I mean, I think as we look at Q4 and as we look at next fiscal year, we -- the effort is to get back on pace with investments in sales and marketing, and that's all focused on being able to continue to drive growth into the future.

Samad Samana -- Jefferies -- Analyst

Great. Thank you, guys, for taking my questions.

Toby Williams -- Chief Financial Officer

Sure.

Operator

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

Matt Pfau -- William Blair -- Analyst

Hey, guys. Thanks for taking my question. Just one for me on the competitive environment. Wondering if you've seen any changes in your competitive win rates. I think one of your competitors was out there talking about them seeing better win rates. So just wondering what you guys are seeing out there in the market.

Steve Beauchamp -- Chief Executive Officer

Yes. I think what I would tell you is I think our win rates have been fairly consistent over time, not necessarily a lot of change there. I think what the call out is we're seeing more activity. So more first-time appointments, more deal flow, more activity. And that's probably the part that's more encouraging. I think we feel good about the win rates that we've had and the consistency that we've been able to deliver wins versus our competitors and wouldn't call out a change there.

Matt Pfau -- William Blair -- Analyst

Great. Thanks, guys.

Operator

Thank you. Our next question comes from Robert Simmons of RBS -- I mean, RBC. Your line is open.

Robert Simmons -- RBC -- Analyst

Hi. Good -- thanks for taking the question. You gave the forms headwind is $3.5 million to $4 million. I just want to check two things. That was versus trend, right, not year-over-year? And does that include both W-2s and ACA-related trials and that kind of thing?

Toby Williams -- Chief Financial Officer

So the $3.5 million to $4 million was the actual impact in the quarter in dollars, and that was related to W-2s as that -- that's almost all of it, yes.

Robert Simmons -- RBC -- Analyst

Okay. So was there also like additional ACA impact as well for the ACA annual form filing requirements?

Toby Williams -- Chief Financial Officer

So the ACA impact would have been embedded in kind of the employees on the platform on an ongoing basis because we typically, for most of the clients, we bundle that as an ongoing service. So rather than just charging one time, it gets spread out throughout the year.

Robert Simmons -- RBC -- Analyst

Got it. Okay, great. And then you mentioned retention as being pretty consistent, but can you give a little more color there? Like are you still seeing some businesses that dropped down to zero employees and they're sticking around and paying like the very little minimums, but they haven't turned you off or what's -- anything that would be useful?

Toby Williams -- Chief Financial Officer

That's a detailed question, for sure. Yes, retention has been strong, overall, right? We're generally focused on revenue retention being above 92%, and we continue to see that. It's been a strong year for us from a retention perspective. We do manage the clients that might go down to no employees and tell us, "Hey, I'm not going to process any payrolls for the next month. I don't -- I'm going to pay you some minimum amount." But we are pretty quick at going back at those clients and making an assessment in terms of whether they're going to continue.

And so we would never have a buildup of customers who are not doing anything on our platform for any period of time. We would actually take those as a loss and reengage them when their business came on if we had to. But it's a really small number, small number of clients and very small amount of revenue.

Robert Simmons -- RBC -- Analyst

Got it. Thank you.

Operator

Thank you. Our next question comes from Alex Zukin of Wolfe Research. Your line is open.

Alex Zukin -- Wolfe Research -- Analyst

Hey, guys. Thanks for taking my question. I'll try to keep it to just the two. So maybe just stepping back a little bit, Steve. If you think about where your pipelines are, where your pipeline coverage is, when you were going into the pandemic, you started really seeing almost an acceleration in some of those metrics and the execution. Are we at a point now where we are back to that kind of pre-pandemic new sales execution mode? And are you seeing anything like -- is there almost like a coiled spring of people that were hesitant to move that maybe now, as budgets have loosened, the environments may be reopened, there's a little bit more willingness to -- and so there's almost like a pent-up demand type of situation?

Steve Beauchamp -- Chief Executive Officer

Well, it's hard to know exactly where we sit right now. So what I would tell you is going into the pandemic, we called out the fact that we were over 40% bookings versus the prior year. We had significant amount of momentum, and that was both in activity and then obviously, in terms of getting those customers started. What I would tell you is throughout the pandemic, It certainly is a little bit more of a challenging sales environment, but it's a big market and a big opportunity. So we're able to focus on industries and states where those opportunities existed and still continue to have what we thought was pretty good growth.

We are now, I think, more recently, meaning the last couple of months and maybe not uniformly across the country, but as different markets have reopened, the activity levels have certainly increased. And we see that both in first-time appointments in bookings. And we're probably not quite at that pre-pandemic level yet, but we feel like we're heading toward it, and that's giving us the reason for the optimism.

Alex Zukin -- Wolfe Research -- Analyst

Got it. And then maybe just one for Toby. If I look at -- I realize we're not giving any guidance for next year. But if I look at the tailwinds in the business comping the COVID period, you're getting a little bit of a boost in productivity. You're getting some incremental modules that you're now able to sell. You're seeing some recovery, at least in float and interest rates, some recovering employment trends. Is there anything that should be different about the seasonality of the business sequential growth? From a sequential growth perspective, as we think about the shape of fiscal '22 or any elements around why we couldn't see a little bit heightened growth trajectory versus previous years?

Toby Williams -- Chief Financial Officer

I mean, there's a lot in that question. I mean, I don't think there's anything structurally different in the business that would give you a different shape to the things that you watch on a quarter-to-quarter basis throughout the course of the year. I think the only thing I'd say is an awful lot of the things that you mentioned are early days of tailwind and they're pretty hard to foresee how exactly those are going to play out from a timing standpoint in the course of next year, or if they do. I mean -- and so I mean, I think you're hearing optimism from us in terms of what we've seen in March and -- or the back half of March and April.

Certainly, it would be great for the world to see those things continue. It's hard to necessarily quantify how they're going to play out next fiscal year or the timing that you might see associated with them, but there's nothing structurally different in the business from a -- if you're in a steady-state perspective, so...

Alex Zukin -- Wolfe Research -- Analyst

Understood. Thank you, guys. Congrats on a good quarter.

Toby Williams -- Chief Financial Officer

Thanks.

Operator

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

Matt Diamond -- Mizuho -- Analyst

Hey, guys. This is actually Matt Diamond, on Siti's behalf. Thanks for taking the question. I want to ask Alex's question a little bit differently. It was noted that Premium Video and the majority of the platform is -- keeps -- starting to resonate. I'm very curious, I would imagine that the customer base is going to start thinking about a return to the office, as most of corporate America has. Does that have any ramifications for your sales cycle? Would people consider Premium Video and Learning Management Systems, at least the modernity of those, any different priority-wise, as in-person interactions resume and people are more than pixels on a screen?

Steve Beauchamp -- Chief Executive Officer

So I think the conversations that we've been having with our customers, as you mentioned, everybody is trying to figure out how they're going to do this, particularly, in a knowledge worker economy, where they can be effective from home. Most of the conversations that we've had with people is that that new normal is some sort of hybrid. And so what that means is maybe I was in the office five days a week, now I'm going to be in the office three days a week. Maybe I've just got more flexibility around what my scheduling is. We've come to a level of trust, and we've been able to see what productivity can look like from work-from-home scenarios. And it's -- I think it's going to be difficult to be able to keep that and return back to the way it was before, particularly as the economy is growing and finding the right talented people is going to be a challenge.

So I think that those products are going to continue to resonate even if people are back in the office for some period of time. And actually, they could become very important as part of driving your culture in an environment where you don't have everybody in the office every day. And so we feel like that trend will very much likely continue based on the conversations we've had, and that's certainly what it's going to look like here at Paylocity.

Matt Diamond -- Mizuho -- Analyst

Understood. And the -- it dovetails really nicely to my next question. Does that -- do the plans for your own virtual sales approach in the second half, and it was alluded to earlier, as T&E potentially comes back, has that been dialed into a point where the virtual sales approach could be something that's long-standing and not -- it wouldn't gradually fade away as reopening pervades more and more?

Steve Beauchamp -- Chief Executive Officer

Yes. What I would tell you is the great thing about salespeople is they're very creative, they're entrepreneurial and they want to follow where the market is to find the revenue. And so what I mean by that is, if customers are much more comfortable having in-person conversations and they want to move that way, then our sales force is certainly ready to do that. And there are absolutely cases where they're having on-site appointments today.

The salespeople also recognize that if they can do that virtually and avoid a drive and the customer is very comfortable, they'll do that. And so we want to make sure we arm our salespeople with all the tools they need to be successful, either virtually selling clients from their home office, as they're doing today, or getting back on site with customers and making sure that we can do it the way that the customers are most comfortable. I think like my answer before, you're going to see a bit of a hybrid and a bit of a new normal where it's going to happen both ways. And we're going to make sure that the sales reps are ready to do it either way.

Matt Diamond -- Mizuho -- Analyst

Excellent. Thanks so much, guys.

Operator

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

Jeff Van Rhee -- Craig-Hallum -- Analyst

Great. Thanks for taking my question. Just one for me. On the quarter, in terms of the variance, can you just put a little -- maybe a little finer point on it. I think you had about $1 million of revenue upside, give or take, about $6 million on the EBITDA side. And maybe just spend a second there in terms of the variance around margins and spend, just so I have a little more clarity on the quarter itself.

Steve Beauchamp -- Chief Executive Officer

Sure. So some of the variance certainly comes from the fact that we got a little bit of recovery right at the end of the quarter, as Toby said, more in the back half of March. So that's certainly a smaller portion of it. And then we were hopeful at the start of the year that we would be able to be back to travel and doing some of the meetings and have much more in-person contact. So as we kind of budgeted in the quarter, we were able to do better from an expense perspective.

And then I think lastly, to my earlier point, some of these products that we're able to get higher penetration rates on are driving some margin expansion. So you saw that in gross margin. So I think it's a combination of factors that have translated to a bigger beat on adjusted EBITDA than we had in revenue.

Jeff Van Rhee -- Craig-Hallum -- Analyst

Yes. Thank you.

Operator

Thank you. Our next question comes from Arvind Ramnani of Piper Sandler. Your line is open.

Arvind Ramnani -- Piper Sandler -- Analyst

[Indecipherable] taking my question. Congrats on a good quarter. just wanted to kind of ask about the competitive environment. I know the question has been asked a couple of times. But what I'm really looking to understand is, certainly, like some of the more legacy players, like ADP and Paychex have been making investments on making their solution more kind of cloud and more agile.

And then you've had some of the more niche players, whether it's a Paycor or a Bamboo, kind of really kind of coming from a different perspective. So have you kind of seen kind of increased competition from either of these two groups? And the follow-up is from a product roadmap perspective, do you feel you're making the right investments to kind of keep ahead of the competition over the next couple of years?

Steve Beauchamp -- Chief Executive Officer

Sure. So I think on your first question, it's always been a pretty competitive environment. I think it's pretty typical that a customer is going to look at two or three providers. Our size market, they probably can't handle evaluating a lot more than that. So that's always the case. And yes, you see the biggest players in those deals all the time. And some of the newcomers, we're used to competing with. And as I mentioned earlier, we have not seen really a change in our win rate.

So we've been pretty effective throughout the pandemic in terms of competing. I think your second point on, we really do believe that some of the bigger macro trends in terms of work from home, increased flexibility, Gen Z entering the workforce and having different demands on their employers, and people wanting tools at work that feel like their tools at home all really bode well versus our product road map. And so we're excited about what we just launched with our Modern Workforce Index, where we actually have a recommendation -- proprietary recommendation engine built on a scoring model that will allow people to measure their progress in terms of how effective they are with their communication, how engaged their employees are. And that's an example of something that's pretty unique and innovative.

That, combined with what we've done in Community, we think is a good proof point of us really being one of the more modern platforms, if not the most modern platform in the marketplace. And I think those trends are going to absolutely continue in this new hybrid work environment. And we feel really good about the investment we've made in our data science team in Community, in video, even with the most recent acquisition, which is still in the integration process of Samepage, all really speak to that modern employer.

Arvind Ramnani -- Piper Sandler -- Analyst

Terrific. And Steve, I know like when we met in 2019, you were excited about Community and video. And certainly, you probably didn't anticipate the pandemic at that point, but certainly kind of the usage of this must have gone up with your clients. But kind of -- have you kind of taken a look at the product road map over the next couple of years? Are there certain areas where you need to sort of make bigger investments and shoot up more quickly than if the pandemic had not happened?

Steve Beauchamp -- Chief Executive Officer

Yes, it's a good question. I would call it our data science team and some of the stuff we've done around the algorithms and machine learning. I mean one of the challenges customers have, and this was brought up earlier, they're not sure oftentimes what to do, especially the average customer with a little more than 100 employees. And so now I've got employees who are only in Monday and Wednesday and other employees are on Thursday and Friday, and I've got this whole flexible schedule environment, and I've got younger people entering the workforce, and I'm having a hard time connecting with them.

And so we're really excited about actually leveraging the data that we have from the more than 25,000 clients on our platform and figure out who's got the lowest turnover, who's got the best practices, and then being able to surface that to our clients so that they know what they do, so they know how to use community, they know what to post, they know how employees are going to engage.

And so this idea of investing in data science and then really helping our clients with best practices. If we do that well, those clients are going to see higher retention of their employees, and they're going to get more productivity for those employees that stay longer, and we think that's a really powerful value proposition.

Arvind Ramnani -- Piper Sandler -- Analyst

Yes, makes a lot of sense. Thank you very much and good luck for the rest of the year.

Steve Beauchamp -- Chief Executive Officer

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Steve Beauchamp, CEO of Paylocity, for any closing remarks.

Steve Beauchamp -- Chief Executive Officer

Yes. Great. Thank you. I'd just take a brief moment to thank all of you for your interest in Paylocity and definitely want to thank our nearly 4,000 employees across the country who've been working hard during a very challenging time. So I hope everyone has a great evening.

Operator

[Operating Closing Remarks]

Duration: 51 minutes

Call participants:

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

Steve Beauchamp -- Chief Executive Officer

Toby Williams -- Chief Financial Officer

Scott Berg -- Needham -- Analyst

Brian Peterson -- Raymond James -- Analyst

Brad Reback -- Stifel -- Analyst

Terry Tillman -- Truist -- Analyst

Mark Marcon -- Baird -- Analyst

Bryan Bergin -- Cowen -- Analyst

Samad Samana -- Jefferies -- Analyst

Matt Pfau -- William Blair -- Analyst

Robert Simmons -- RBC -- Analyst

Alex Zukin -- Wolfe Research -- Analyst

Matt Diamond -- Mizuho -- Analyst

Jeff Van Rhee -- Craig-Hallum -- Analyst

Arvind Ramnani -- Piper Sandler -- Analyst

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