Paylocity Holding Corp

NASDAQ:PCTY

Earnings Call Transcript 2022-Q3

[Operator]

Good afternoon, everyone. Thank you for standing by, and welcome to Paylocity Q3 FY 2022 Earnings Conference Call. I would now like to hand the conference over to Mr. Ryan Glenn, Chief Financial Officer.

[Ryan Glenn, Chief Financial Officer]

Good afternoon, and welcome to Paylocity's earnings results call for the third quarter of fiscal '22, which ended on March 31, 2022. I'm Ryan Glenn, Chief Financial Officer. And joining me on the call today are Steve Beauchamp and Toby Williams, Co-CEOs 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 the directly comparable GAAP financial measure because the information which is needed to complete a reconciliation is unavailable at this time without unreasonable effort.

In regard to our upcoming conference schedule, Toby and I will attend the JPMorgan Global Tech Conference in Boston on May 25. I will attend the Jefferies Software Conference in San Francisco on June 2. Toby and I will attend the Stifel Cross Sector Insight Conference in Boston on June 7 and the Baird Global Consumer Tech and Services Conference in New York on June 8. And Steve will attend the William Blair Growth Stock Conference in Chicago also on June 8. 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]

Thanks, Ryan, and thanks to all of you for joining us on our third quarter fiscal '22 earnings call. The momentum from our record-setting selling season continued throughout the third quarter with strong sales execution across our target market. Q3 revenue growth was 32.2%, marking our third straight quarter with more than 30% revenue growth as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. In particular, our products focused on the modern workforce are resonating with clients and prospects as they navigate how to best connect, communicate and collaborate with their employees in an increasingly digital world.

The momentum from this digital transformation is reflected in improving attach rates across our suite of modern workforce solutions, including community, which has seen usage among our client base increase significantly since its initial launch two years ago, culminating in 1 million monthly active users in January. Moreover, the number of discussion groups and public peer recognition through the use of impression has increased every month while employer announcements, posts and reactions have increased by nearly 60% over the last 12 months. This level of increased usage by our clients demonstrates community's ability to help companies more readily engage and connect with their dispersed workforces.

To that end, in April, we announced the release of Community Plus, which introduces new functionality, including one-to-one and one-to-many chat functionality, the ability to create, edit and share files and the automated addition of employees to team groups as they join the Company. We believe the addition of these new premium features will drive even greater utilization of Community and increase modern workforce index scores, which have been shown to improve employee sentiment, productivity and profitability. The launch of Community Plus will increase our PEPY from $420 to $440.

Our commitment to product development also continues to be recognized in the market with Paylocity once again being ranked among the G2 Best Software Products and Best HR Products List for the third consecutive year. Additionally, Paylocity was named an overall leader for all 12 HRIS categories in the G2 Spring 2022 Grid Report as well as being recognized as a leader across our target market.

I would now like to pass the call to Toby to provide further color on the quarter.

[Toby Williams, Co-Chief Financial Officer]

Thanks, Steve. Throughout Q3, we continued to see strong performance from our sales teams in a robust demand environment. Also, as Steve highlighted, our differentiated value proposition of providing the most modern software in the industry continues to gain traction and has resulted in increased product attach rates with both new and existing clients. Our sustained investment in R&D has created products purpose-built for the modern workforce while providing our sales teams the ability to distinguish Paylocity from competitors during the sales process.

Strong sales performance and operational execution helped drive our total revenue to $246 million or 32.2% growth over Q3 of last year, beating the top end of our guidance by $3 million as we continue to build momentum across our target markets. We also continue to be pleased with our success in go-to-market hiring and attracting talented sales reps and we are very confident in our ability to hit our staffing targets to start next fiscal year as we head into the heart of sales staffing season.

Additionally, channel referrals, primarily from benefit brokers and financial advisers, once again represented more than 25% of new business for the third quarter as we continue to leverage both virtual and in-person broker meetings and events to help us maintain the strong source of referrals. We will continue investing to support channel referrals and in digital marketing efforts, both of which have driven increased top of sales funnel activity and productivity this fiscal year.

Our strong revenue outperformance, coupled with continued operational execution, helped drive adjusted EBITDA of $85.7 million or 34.8% margin, which exceeded the top end of our guidance by $5.7 million. Our award-winning and remote-friendly culture continues to resonate with prospective employees, and we expect to continue investing in headcount across all areas of the business as we close out the year to ensure we are well positioned to drive future growth and scale the business in fiscal '23 and beyond.

Our strong culture has also been recognized externally as Paylocity was recently named to the Forbes 2022 America's Best Midsized Employers and Best Employers for Diversity List. A big thanks to our more than 5,000 employees who live and represent our values every single day and who worked so hard to support our clients in Q3.

I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal '22 guidance.

[Ryan Glenn, Chief Financial Officer]

Thanks, Toby. Total revenue for Q3 was $246 million, an increase of 32.2% with recurring and other revenue up 32.4% from the same period last year. As Toby noted, our sales team had another strong quarter, and we were pleased to come in $5 million above the midpoint of our Q3 guidance and to raise fiscal '22 revenue guidance by $97 million at the midpoint, resulting in fiscal '22 guidance of 32% to 33% revenue growth.

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 dollar basis, our year-over-year investment in total R&D increased by 28.8% when compared to the third quarter of fiscal '21 and we remain focused on making incremental investments in R&D as we continue to build out the Paylocity platform to serve the needs of the modern workforce.

In regards to our go-to-market activities, on a non-GAAP basis, sales and marketing expense was 19.3% of revenue in Q3, and we also remain focused on making incremental investments in this area of the business to drive growth going forward. On a non-GAAP basis, G&A costs were 12.2% of revenue in the third quarter versus 11.9% in the same period last year.

Our adjusted EBITDA was $85.7 million or 34.8% of revenue for the quarter, which exceeded our guidance by $5.7 million at the top end, and we remain committed to progressing towards our adjusted EBITDA target of 30% to 35% over time. Briefly covering our GAAP results. Q3 gross profit was $170 million, operating income was $47.4 million, and net income was $34.8 million.

In regards to the balance sheet, we ended the quarter with cash, cash equivalents and invested corporate cash of $96.5 million. In regard to client-held funds and interest income, our average daily balance of client funds was $2.4 billion in Q3, and we are estimating the average daily balance will be approximately $2.2 billion in Q4 with an average yield of approximately 5 to 10 basis points realized in the fourth quarter. Additionally, please note that our guidance does include the impact of recent movement in the Fed funds rate. And although we expect the impact to be more material in future periods, we do not expect this to have a material impact on Q4 results given the recency of the increases in interest rates.

Overall, 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.

With that said, I'd like to provide our financial guidance for Q4 and full fiscal '22. For the fourth quarter of fiscal '22, total revenue is expected to be in the range of $215.5 million to $219.5 million or approximately 30% growth over fourth quarter fiscal '21 total revenue. And adjusted EBITDA is expected to be in the range of $49.5 million to $52.5 million. And for fiscal year '22, total revenue is expected to be in the range of $839.2 million to $843.2 million or approximately 32% to 33% growth over fiscal '21. And adjusted EBITDA is expected to be in the range of $228 million to $231 million, implying an adjusted EBITDA margin of approximately 27.3%, which represents leverage of 60 basis points versus last fiscal year as we've driven scale across our business to more than offset the roughly 50 basis points of dilutive impact of the Blue Marble and Cloudsnap acquisitions.

In conclusion, we are pleased with our Q3 results and we're pleased to raise fiscal '22 guidance to 33% revenue growth at the top end, which in combination with the adjusted EBITDA margin represented in our full year guide, achieves the Rule of 60 for fiscal '22.

Operator, we are now ready for questions.

[Operator]

[Operator Instructions] Our first question will come from the line of Scott Berg from Needham.

[Scott Berg, Needham]

Sorry about that. I hate it when I'm talking to myself on mute. Sorry, guys. Congrats to Toby and Ryan on their promotions mid-quarter. I guess a couple of things here is, I just wanted to kind of talk about your upmarket traction. I know last quarter, you talked about expanding the top end of your target market above 1,000 employees. You've been there. Historically, this is just kind of a formal announcement. Did you see anything in the quarter maybe that was beneficial in your sales efforts after this "formal announcement?" Or was it kind of, I guess, operations as normal there?

[Ryan Glenn, Chief Financial Officer]

Yes. I think I would call it business as usual. We had really strong performance across the entire sales force. So the team that's focused on some of the larger clients as -- we've called them out in the past as having some really good momentum in terms of bringing on customers above 500 employees in that -- even in that 1,000 to 5,000 market already, and that was continued momentum with -- in the quarter. But overall, really pleased with seeing the productivity boost that we're getting in the sales force when you look at it on a year-over-year basis.

[Scott Berg, Needham]

Got it. Helpful. And then from a follow-up question, I don't know if Steve or Toby wants to take this, is I know historically, over the last several years, we've talked about your customers buying more and more modules over time and the reasons are many. Today, it's difficult to hire. The environment is certainly more difficult than what it's been over the last several years. Engagement -- employee engagement is a big deal. But if we look at your product suite today, kind of a two-part question is, one, how penetrated is your average customer with your modules today? And then two, how do you think that's trended maybe over the last three or four years? Are we maybe at 50% today and almost 25% before? Any viewpoint on that would be helpful.

[Ryan Glenn, Chief Financial Officer]

Sure. Yes. So we've added a lot of product, obviously, since going public. We're now more than double the time that we went public in terms of product and now at $440 per employee per year. We give you the number of clients and roughly the average size customer every year. So you can kind of calculate the actual realized PEPY when you take the recurring revenue.

And so when you do that math, we've historically been in the maybe early on days below 50%, but more recent years, we've been above that 50% in that 50% to 60% realized potential of the total available product to sell. And so as we add product, we also increase attach rates, and we've kind of stayed in that range over the last three years, which means the new products that we're adding are attaching at similar rates to the prior products that we had in the market. And then, of course, we're driving incremental attach rate even on those prior products.

So something like recruiting that we've had in the market for a long time is up year-over-year pretty nicely, just as something like video, which is only two years old, is up even more on a percentage basis. And so we've had that natural rhythm of attaching the new products at a nice rate, but still driving higher attach rates from the products that we've had in market for a longer period of time.

[Operator]

Our next question will come from the line of Brian Peterson from Raymond James.

[Brian Peterson, Raymond James]

So I wanted to start on Community. It's great to hear on the adoption. Steve, parts of the offering are things that maybe I wouldn't traditionally see as kind of within that HCM swim lane. And I know you guys are a product-driven company. I'm curious, given the adoption that you've seen in that product, does that change kind of the product road map into other potential areas over the long term?

[Steve Beauchamp, Chief Executive Officer]

Yes, it's a good question. So I think the way we see it is this is a challenging time to be leading an HR organization. Not only is it a very tight labor market, but you've got different dynamics in the workforce in terms of work-from-home trends that are increasing rapidly, different demands from Gen Z as they enter the workforce. And so HR departments are really being stretched and they're being asked to communicate, collaborate and connect with employees in a different way because ultimately, they're trying to drive attraction and retention of talent to help grow their business.

And so the traditional compliance-oriented, very ROI-driven things are still important to them, and we have all of those things, but we are seeing increased demand for new innovative ways to leverage a more modern platform to connect with employees. And so the more recent example is if you're a brand-new employee on our platform now with Community Plus, and you don't know anybody on the team, the first thing you're going to get is a notification that says, "Come meet your team." You can go through the profiles of all the people on your team. You can answer some icebreaking questions. You can get some backgrounds of those individuals. And that's a much more modern scenario, particularly in a remote environment.

So it's examples like that, that we're seeing really gain traction that, as you said, go beyond the traditional compliance kind of ROI, automation-driven message and extend into a much more modern experience that we think can drive significant benefits when it comes to retaining talent and then ultimately getting our customers to be successful growing their business.

[Brian Peterson, Raymond James]

Right. That's great to hear. And then maybe just on the go-to-market side. As we think about the world maybe returning to more of a kind of an in-person dynamic, does that influence kind of the source of net new leads or productivity? I guess, we've maybe got the normal to the virtual engagement strategy here. I'd just be curious how do you think that could change as you go back to maybe more in person.

[Toby Williams, Co-Chief Financial Officer]

Brian, it's Toby. I mean I think if you think about our -- two different motions on this, one is the sales force, field sales force and then the other is relative to referrals from brokers as an example, which continue to be north of 25% for us for the quarter. They are getting back into the motion of being live with clients. Certainly, that's preferred, and we certainly think that there's productivity advantages with that. Teams started to get back into -- as things have opened up over the last couple of quarters, started to get back into live discussions with clients when that works for clients and same thing with brokers and broker events to, I think, continue the productivity momentum that we have across the teams. And we certainly think that, that helps and continuing to get more and more into that as we sort of work our way out of the pandemic.

[Operator]

Our next question will come from the line of Bryan Bergin from Cowen.

[Bryan Cowen]

Congrats on the promotions, guys. First question I've got is on Community. So just curious if you can give us a sense of the mix of clients that were using Community and how you're thinking about the potential for those clients upgrading to Community Plus. So any different, I guess, assumptions around adoption around this product or attach pace versus as product experience just given you have effectively a freemium version out there already?

[Ryan Glenn, Chief Financial Officer]

Right, right. Yes. So I think just for clarification, so all of our clients had free version of Community available to them. And we've been really successful at driving higher utilizations over time, the feature sets. And then we've listened to the customers, and we've added capabilities to that free version, which I think has helped make us successful.

We felt like we were at the point where we've seen enough utilization across the client base that adding some of these premium features would have benefit to the customers and drive an attach rate such that it was worth making the investment. And so we're early in that. We just launched the product. We have -- as we always do, have early adopters on the product, and we have live client feedback from those early adopters, and that is trending really well.

We'll do the same thing as we've done with every other product. We'll listen to our customers, we'll add features and capabilities. But if you go back and you look at the success we had with video most recently, video quickly attached at a fairly strong rate with new customers. And then we really started to have some success selling it back to the client base. And so we're hoping for similar results with this brand-new product.

[Bryan Cowen]

Okay. And then a follow-up on kind of just inflation and pricing. Can you just talk about how you're managing, I guess, internally these outsized levels of wage inflation? And then on the other side of it, from a pricing standpoint, have you considered pricing increases into the base? Can you just talk about your methodology and approach around that?

[Toby Williams, Co-Chief Financial Officer]

Yes. So I think from a price increase standpoint, we did and we talked about this before. While we hadn't done price increase during the early part of the pandemic, we did look at it as we came through this year. And what I would say is while we certainly are aware of and observant of the inflationary environment, we did go back to a price increase this cycle through. And I would say on a relative basis, consistent with what we have done in other years, I would not say there was any sort of outsized lean in this year despite what we recognize as an inflationary environment.

And I think the one thing I would say -- that's the external piece that you asked about. From an internal perspective, what I would say is, we've still continued to have, I think, a high degree of success in our staffing efforts across the business. We are just coming into the heart of sales staffing season. We feel really good about our momentum in that so far. And we, I think, feel equally good about the momentum that we've had and continued success that we've had staffing across the business in what we absolutely recognize as a pretty tough labor market. I think we've definitely seen some pressure there from a wage perspective. But I think we feel pretty good about our success so far.

[Operator]

Our next question will come from the line of Samad Samana from Jefferies.

[Unidentified Analyst]

This is [indiscernible] for Samad. Steve, Toby, Ryan, congrats on the strong results. So many are apprehensive about the potential economic slowdown and smaller companies are often impacted before enterprises are. So on down market demand, are you guys seeing any changes there, either in the time it takes to close a deal or maybe delays in decision-making?

[Ryan Glenn, Chief Financial Officer]

The demand environment has been really strong for us this year, as evidenced by the results and probably the commentary around sales. Not only are we seeing great sales momentum in terms of driving attach rates in the products, but we're also seeing strong demand just in terms of activity levels. So whether it's first-time appointment, number of deals that we're onboarding, all of that has been really positive.

And so when we look at things on a year-over-year basis, we're happy with the growth. We're definitely back to the, like, prepandemic strong demand environment, no question about that, and we're actually driving productivity increases year-over-year. And so from a recency perspective, we've seen no change in those dynamics at all.

[Unidentified Analyst]

Awesome. That's great to hear. And then a quick follow-up on Community. So usage has long been the topic of the call and Community Plus seems to make a lot of sense. You called out the MAUs as of January. Kind of as the world has opened up post-Omicron, right, so post January, have you seen any impact to usage either the hold or by business size?

[Ryan Glenn, Chief Financial Officer]

Yes. So I think embedded in the question is a thesis that maybe there is some pandemic activity driving utilization. I would tell you that utilization continues to be really strong from that January peak number that we provided the last several months. And we're continuing to add features. We're reacting to client feedback. We think we're adding more value over time. So one of the things that we're finding is even if you're kind of in the office, this is a mobile-first environment. So a lot of that activity is driven right off their mobile phone.

And so the fact that maybe they're not working at home and the fact that they're commuting back to work a little bit more, we don't necessarily see that as drawing away from the value that we're offering. In fact, the more you're kind of moving around, sometimes the more we can offer value by making the information available to you in the palm of your hands. And so we've seen continued improvement in utilization over time.

[Operator]

Our next question comes from the line of Terry Tillman from Truist.

[Robert Dee, Truist]

This is Robert on for Terry. Just a couple of super quick ones for me. First on M&A. Any update on M&A strategy or anything changed in terms of what you're seeing in the private markets?

[Ryan Glenn, Chief Financial Officer]

No, I wouldn't call any particular update there. I mean, I think you've seen what we've done over the last few years, been very focused from a product and technology and road map advancement standpoint and given us the sort of the ground to add things like video and ultimately some of the features that we've brought in with Community Plus. But I don't think there's any change there from either a direction or a strategy or activity standpoint.

[Robert Dee, Truist]

Great. Appreciate it. And then just one quick follow-up on macro. So of course, no one has a crystal ball, but broadly speaking, how are you thinking about potentially front-running a potential downturn in terms of maintaining stickiness with customers?

[Ryan Glenn, Chief Financial Officer]

Yes. Well, we've been through many cycles in the past, right? So we don't know what this cycle is going to look like. So what I always say is think about what that GDP number looks like. And in a growth environment, GDP is growing 3% or 4%. We get -- the benefit we get is pace per grows a little bit. But it doesn't grow 3% or 4%. It's half that roughly.

And then in a declining environment, you're going to see similar dynamics. So if GDP declines, we saw this even with COVID, obviously, COVID accelerated, but we had lower number of employees on the platform. That is the primary impact. The secondary impact is typically interest rates. This is different because obviously, we benefit if interest rates rise. So if there's some slowdown and interest rates rise, that kind of offsets it. We have not historically seen that affect demand. In fact, when you get to times where there's a little bit less resources for those HR departments, they become more likely to look at what solutions are available in the market. They're looking for value that's ultimately going to deliver them. They're looking for some of that automation and connection that we're offering them.

And so when we look at historical downturns, it's been largely, is there potentially slightly fewer employees on the platform, what happens with the interest rate environment, but we've been able to sell through that in the past, and we would anticipate having success in the future.

[Operator]

Our next question will come from line of Brad Reback from Stifel.

[Brad Reback, Stifel]

Great. Toby, I think you mentioned during your prepared remarks some commentary around your digital marketing efforts. I'm wondering, as you look at those leads versus other leads in the funnel, are those meaningfully better and the close rates higher? Or is it similar across all your leads?

[Toby Williams, Co-Chief Financial Officer]

Yes, sure. I mean I think if you -- so if you go back to how we would think about lead gen overall, I mean, I think you've got the buckets of rep-generated leads. You certainly have the channel- and broker-generated leads. Again, that was north of 25% for us again the quarter. And then you have us leaning, I think, a little more heavily over the last few quarters and probably the last year or so into digital.

And I think we're really pleased with the progress that we've seen as we get more maturity there. That's an area that we'll continue to invest in. And I think from a productivity standpoint, it certainly goes to helping rep productivity. And I think we're, overall, pretty pleased with the progress that we've seen there, both in terms of the close rates that we're seeing with those and I think our ability to invest more there as we look forward.

[Ryan Glenn, Chief Financial Officer]

I'd just add color to that, Brad. I think channel leads, we love the channel leads because that's a recommendation. And so we typically have great success in terms of close rates there. So by no means do we plan on taking any focus away from channels. That's been a consistent part of our performance. But as Toby pointed out, we look at other lead sources and replacing some of those other lead sources with digital leads definitely has an opportunity for improved productivity, and we've seen some of that in the results that we've been posting.

[Operator]

Our next question is from the line of Matt Pfau from William Blair.

[Matt Pfau, William Blair]

Nice results. I wanted to follow up on Blue Marble, maybe just an update on how that acquisition is progressing. And then I don't think Blue Marble offers employer of record services, but is that an area that is of any of interest to you? Because it seems like that market is pretty robust right now.

[Ryan Glenn, Chief Financial Officer]

Sure. So Blue Marble does not offer employee of record services. They really are providing aggregation services so that if you want to pay your employees in multiple countries, they aggregate all of that data, provide a software layer in between and then connect with in-country providers. And so that hasn't changed. That's always been their value proposition.

We've seen some nice traction just by really connecting the go-to-market teams much stronger and really looking at lead generation for that team. So that's been successful. We are still in the relatively earlier stages around the technology integration. So that is progressing well. We see that as still a future opportunity to deliver a much more integrated suite. And obviously, the trends around clients potentially having international employees continues to grow. So the market as a whole, as you mentioned, it's a growth market, so that we're excited about, and we've achieved kind of the objectives that we had in front of us, but we are still in the throes of the technology integration.

As you know, when we have an acquisition, we want to build it such that from a user perspective, it's a singular platform and the experience is completely unified. And so that takes a little bit longer. It takes time, but that's always been our approach. And we're in the process of doing that with Blue Marble, which we think will deliver an even better client experience than we're doing today.

[Operator]

Our next question will come from the line of Alex Zukin, Wolfe Research.

[Ryan Krieger, Wolfe Research]

This is Ryan on for Alex. Just a quick one on the guide. So for 4Q, you called for 30% on a really tough comp from 4Q last year, which is incredibly impressive. So just wondering how we should think about bookings momentum from here given the tougher comps going forward.

[Ryan Glenn, Chief Financial Officer]

Sure. So I think to your point, we feel really good about the guide and having now had three straight quarters of 30% plus revenue growth and guiding here to the high 20s to 30% for the fourth quarter. And I think that's really driven off of all of the momentum you've heard about in the prepared remarks. So a record selling season, some really good momentum in the early parts of Q4, product attach rates increasing. So I feel good about that guide. Obviously, there's still a bit of a tailwind from the employees on the platform related to COVID. That will start to go away as you get into fiscal '23. But I feel like there's a lot of momentum and certainly feel good about the fourth quarter guide and then the large raise to the fiscal year as well.

[Operator]

Our next question will come from the line of Kevin McVeigh from Credit Suisse.

[Kevin McVeigh, Credit Suisse]

Great. And let me add my congratulations as well. Is there any way to think about what the potential revenue impact from the two acquisitions are as you kind of allocate them across your existing client base? So kind of not necessarily what you acquired, but as you implemented across the existing client base, how that can scale and contribute based on Blue Marble and so on and so forth.

[Toby Williams, Co-Chief Financial Officer]

Sure. So I think as you think about the commentary we provided to date, particularly on Blue Marble, the impact is less than 2% to this fiscal year from a revenue standpoint. Obviously, as we mentioned in the guide, there's a headwind from profitability. To Steve's point earlier, still working through integrating that product into the broader suite and have not yet added that to the overall product portfolio. But as we continue those integration efforts, I think we'll come back with more color.

[Steve Beauchamp, Chief Executive Officer]

And then I think on Cloudsnap, if you think about that, that was really a technology acquisition that's going to allow us to really streamline the ability to integrate with third-party applications, which is something that we already do today, but it's a low-code kind of no-code environment where you can do that via configuration rather than a whole bunch of technical work on the back end. And so that's less of a revenue opportunity and certainly more of an accelerator around our overall data integration strategy.

[Kevin McVeigh, Credit Suisse]

That's super helpful. And then can you just remind us, and if you said this, I apologize, how are we thinking about use of proceeds from the incremental step-up in float? I know you may not necessarily next quarter, but is that kind of reinvestment in the business? Or just how should we think about that, particularly as it seems like the float will scale in the quarters to come?

[Ryan Glenn, Chief Financial Officer]

Sure. So I think the way that we think about that is certainly, over time, there is likely upside to revenue. And as you're aware, that's very high profit revenue as well and benefit there to profitability, too. I think the way that we would think about that is likely a reasonable portion of that would flow to profit. But certainly, we're making incremental investments in R&D and sales and marketing. And I think we'll look hard at those growth-driving initiatives that we can reinvest a portion of those in. But no question, I think, over time is as you see rates continue to rise, there's some level of upside, but we'll think about reinvesting a portion of those, for sure.

[Operator]

Our next question will come from the line of Robert Simmons from D.A. Davidson.

[Lucky Schreiner, D.A. Davidson]

This is Lucky on for Robert. I was wondering if you guys can maybe quantify form filing fees, how that looked this year versus last year and the longer trend.

[Ryan Glenn, Chief Financial Officer]

Sure. So I'd characterize it as nearing normal levels, but certainly not fully back to pre-COVID levels, absolutely up on a percentage basis from what we experienced last year, which was kind of the mid-single digits growth. So certainly better, but not fully back to pre-COVID levels of growth that we would typically have seen.

[Lucky Schreiner, D.A. Davidson]

Helpful. And then could you maybe -- it was mentioned previously, too, some grumblings in the macro environment. Has that almost though been a good catalyst for you guys? Has the conversation shifted? Obviously, you're still seeing strong demand. Has that almost been good in terms of people trying to get ahead of that?

[Ryan Glenn, Chief Financial Officer]

Yes. I think when you think about our market, I should say, the average size customer 100 employees. I'm not so sure that the macro environment news drives their business in terms of how they operate on a "feet on the street" basis. I think the broader trend that's been helpful to us is less macro and much more what's happening in HR, remote work and the demands of the workforce, the tight labor market. Those things, I think, have really made people look at their platforms and say, "I really need something that doesn't just do the basics, but really allows me to drive engagement, connection and retention, which is a big part of the challenge." And so I think that part certainly has become a bigger part of the conversation, but we really haven't seen any impact in terms of those appointments with customers and prospects that are really focused on the macro environment. They're typically focused on their micro business.

[Operator]

[Operator Instructions] Our next question will come from the line of Mark Marcon from Baird.

[Mark Marcon, Baird]

And let me add my congratulations. Steve, I just wanted to follow on the last comment that you made. Clearly, most small businesses are really focused on the tightness of the labor market, wage inflation, cost pressures. From -- if we take a look at your tools like the Modern Workforce Index, Community, some of your engagement tools, can you talk a little -- and certainly, your applicant tracking modules. Can you talk a little bit more about like how important those are becoming to helping the clients and providing added differentiated value to those clients relative to some of the other alternatives that are out there?

[Steve Beauchamp, Chief Executive Officer]

Sure. I think the conversations that we have with clients and prospects really making sure that they have the talent that they need to be able to not only grow their business, but sometimes just be able to handle the volume that's coming into their business is really top of mind for customers.

And so if we have the ability to help them really engage with their employees in a way that makes their employees feel part of that company, really gets them attached to the Company, keeps them transparent with their communication, then ultimately, that organization benefits from lower turnover. And when you benefit from lower turnover, you're not in the market looking for as many people. You don't have the whole productivity lag from bringing new people on board and waiting for them to come up to speed.

And so that whole concept really resonates with employers, and they're willing to invest and sometimes make changes to their processes to really try to find a way to reduce that turnover. Because, as we know, with the great resignation, turnover has kind of spiked across the board, and that is definitely top of mind. And we're able to show them with Modern Workforce Index that customers who look like you who might be in the same industry as you in similar size actually are getting different results leveraging our tools. And that message is really resonating in the marketplace. And I think our push towards delivering the most modern solutions in the industry is probably one of the bigger drivers for the strong top line results we've gotten in the sales productivity we're seeing.

[Mark Marcon, Baird]

And I really appreciate the comments on the sales productivity. Can you talk about how those tools ended up resonating in terms of impacting retention as you came through the -- that core November through February time?

[Steve Beauchamp, Chief Executive Officer]

Sure. Yes. So we typically update retention on an annual basis, and we typically give you kind of a retention number. I would tell you, without necessarily being prepared to give you the exact number, we feel good about where retention is. Retention's been strong. Last year was really strong from a retention year. This year continues to be really strong from a client retention perspective. And so we think the value that we're offering to our clients is producing the right results, both from a revenue that we're able to drive, but also attach and finally, retaining the customers that we've got.

[Mark Marcon, Baird]

That's great. And then can you just talk a little bit about -- with the strong retention and the strong user ratings, how is that influencing pricing strategy as we're going through this inflationary environment where you have an increased level of permission to raise prices? And then -- and how should we think about that with regards to Community Plus? How is the pricing strategy there?

[Steve Beauchamp, Chief Executive Officer]

Sure. Okay. So I would tell you that we have not changed -- Toby talked about this earlier. So we've not changed our pricing strategy. We look at it on an annual basis. We've got some customers that are at discounts. We look at the price in the market. We look at the features that we've added to that. We look at what's a fair price for those. And then we do a nominal adjustment to price for some reasonable subset of our customers. Not every customer gets a price increase every year. We look at it the same way.

Our view is, yes, there is an inflationary environment. We've been able to manage that environment as you see our increases to the margin forecast and everything that we've been able to do. So our goal is not to do anything outside the history from a pricing perspective, because as you know, you've got to grow over the next year, and you've got the potential to upset some clients during that transition. And so we're kind of back to a normal pricing environment, deliver more value. You get a little bit more out of and it's helpful to us, but nothing out of the ordinary.

[Mark Marcon, Baird]

Great. And then last question, just with your user ratings, with your momentum in the business, and with your comfort in terms of work-from-home, to what extent does that end up impacting the types of people that are trying to apply to Paylocity and to join the team? How would you characterize the quality of the folks that you're currently reviewing as candidates to join the team?

[Toby Williams, Co-Chief Financial Officer]

Mark, it's Toby. I mean I'd just probably build off my comments from earlier. Yes, I think we feel really good about our ability to attract talent in this market. We all are seeing it's a tight labor market. But we've called out the last few earnings calls that we've been actively hiring across the business and including now as we get into the heart of sales staffing season more aggressively there. And I think we're just -- we continue to be pleased with our ability to attract the right level of talent into the business as we're needing it. And I think we've been really pleased with the success that we've been having in almost every role across the Company.

So I think we certainly recognize it's a tough labor market, but I think we've been -- we're pretty happy that our employment value prop is really resonating with candidates in the market, so feel good about it.

[Operator]

And I'm not showing any further questions in the queue. I'd like to turn the call back over to management for any closing remarks.

Steve Beauchamp

Excellent. Well, I want to just thank all of you for your interest in Paylocity. And of course, a big thank you to the 5,000 people that were able to produce such great results. Have a great evening.

[Operator]

This concludes today's conference. Thank you for participating. You may now disconnect. Everyone, have a great day.