Paylocity Holding Corporation misses on earnings expectations. Reported EPS is $0.67 EPS, expectations were $1.21. PCTY isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and thank you for standing by. Welcome to Paylocity Holding Corporation Second Quarter 2024 Fiscal Year Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to Ryan Glenn. Sir, you may begin.
Ryan Glenn: Good afternoon, and welcome to Paylocity's earnings results call for the second quarter of fiscal 2024, which ended on December 31, 2023. 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 herein 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, I'll be attending the Wolfe Conference in New York on February 27th, and Toby and I will be attending the Stifel Executive Summit in Florida in early March and the Raymond James Institutional Investors Conference in Orlando on March 6th. 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: Thank you, Ryan, and thanks to all of you for joining us on our second quarter fiscal 2024 earnings call. Our solid results continued in Q2 of fiscal 2024, with total revenue growth of 20% as our differentiated value proposition of providing the most modern software in the industry continues to resonate in the marketplace. Recurring and other revenue was $298.4 million or 16% growth over Q2 of last year. We continue to receive positive client feedback on our modern product suite, including newer products such as advanced scheduling, learning management, rewards and recognition and employee voice. Specifically, a client in the automotive industry with over 1,000 employees highlighted how the ability to create custom recognition awards that are shareable via the mobile app is positively impacting employee sentiment by making it easier for employees to celebrate one another in new ways.
Similarly, a retail client with 900 employees has created over 200 custom trainings with our learning management module to better connect employees to the company's vision, mission and core values. Additionally, we continue to invest and build upon our AI leadership in the HCM industry with the launch of AI-driven personalized learning plans, optimized workforce schedules and embedded generative AI recommendation within rewards and recognition, employee voice and community. Building upon the generative AI-driven announcement and job description released in community and recruiting last calendar year, these new features help to further improve business efficiency, communication and the end user experience for our clients. While we are pleased with our Q2 results, the macro environment has become increasingly challenging over the last few months as employment levels on the platform once again moderated versus our expectations and presented an incremental headwind to results in the quarter and to fiscal 2024 guidance.
Despite the macro challenges, we continue to invest in our product suite and this commitment to product innovation continues to be recognized by third parties as Paylocity was recently awarded a Bronze Brandon Hall Group Excellence in Technology Award in the Best Advance in Employee Engagement Technology category, and named as overall leader in 10 HCM product category in G2's Winter 2023 Grid Reports, marking the 21st consecutive quarter in which Paylocity achieved leader ranking. I would now like to pass the call to Toby to provide further color on the quarter.
Toby Williams: Thanks, Steve. This is a very busy time of year for all of our teams across the business as they work closely with clients on year-end processing of payrolls, W-2s, 1095s and annual tax form filings to federal state and local agencies and on the implementation of new clients. I want to thank all of our employees for their hard work and dedication to our clients during this very busy year-end season. Building on Steve's comments around product innovation, in early December, we announced the acquisition of Trace, which enables organizations to manage headcount plans, forecast headcount budgets and approved headcount changes. When combined with the valuable employee record data in our platform, we believe Trace's headcount planning capabilities will help our clients improve decision-making and drive faster execution.
A business operations manager, looking over the expense management system that helps simplifies the financials for the company.
From a financial perspective, Trace will not materially contribute to revenue or impact our overall margin profile in fiscal 2024. With respect to our go-to-market efforts, we've realized significant success in the upper end of our target market over the last several fiscal years, and we have invested to grow the size of that team. To date, in fiscal 2024, we've seen sales cycles upmarket take longer, and it has taken longer for our new reps to ramp up which has pressured productivity and new sales volumes in January and has weighed on fiscal 2024 growth. That said, we remain confident in our sales team and go-to-market motion, and we are pleased by our top of funnel activity, the growth of the upmarket pipeline and our ability to drive product differentiation upmarket.
We will be focusing the rest of this year and going into next year on driving a higher level of go-to-market productivity and driving execution upmarket. We have remained focused on our referral channels and have been pleased with the consistency of our referrals, which once again delivered more than 25% of our new business in Q2. We have also continued to drive leverage across the business as we grow and scale with focus on both EBITDA and free cash flow leverage this quarter and this fiscal year. The strong culture at Paylocity continues to be recognized externally as we recently were named to Newsweek's America's Greatest Workplaces for Diversity in 2024 and built-ins list of the 100 best large companies to work for in Chicago for 2023. I would now like to pass the call to Ryan to review the financial results in detail and provide updated fiscal 2024 guidance.
Ryan Glenn: Thanks, Toby. Total revenue for the second quarter was $326.4 million, an increase of 20%, with recurring other revenues up 16% from the same period last year and above the midpoint of our guidance. Our adjusted gross profit was 72.7% for Q2 as we continue to focus on scaling our operational costs while maintaining industry-leading service levels. We continue to invest in research and development and to understand our overall investment in R&D, it is important to both combine what we expense and what we capitalize. On a dollar basis, our year-over-year investment in total R&D increased by 27% when compared to the second quarter of fiscal 2023 and 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 expenses were 21.3% of revenue in the second quarter versus 23.7% in the second quarter of last year. On a non-GAAP basis, G&A costs were 9.1% of revenue in the second quarter versus 11.3% in the same period last year, and we remain focused on consistently leveraging our G&A expenses on an annual basis. Our adjusted EBITDA for the second quarter was $112.6 million or 34.5% margin and exceeded the top end of our guidance by $9.6 million and represented 620 basis points of leverage versus Q2 of fiscal 2023. We continue to be pleased by our ability to drive increased profitability through leverage and adjusted gross margin, adjusted EBITDA and free cash flow while also maintaining strong revenue growth.
Briefly covering our GAAP results. For Q2, gross profit was $219 million. Operating income was $49.7 million and net income was $38.1 million. In regard to the balance sheet, we ended the quarter with cash and cash equivalents of $366.9 million and no debt outstanding. In regard to client-held funds and interest income, our average daily balance of client funds was $2.4 billion in Q2. We are estimating the average daily balance will be approximately $2.9 billion in Q3 with an average annual yield of approximately 450 basis points. On a full-year basis, we are estimating the average daily balance will be approximately $2.5 billion to $2.6 billion with an average yield of approximately 445 to 450 basis points. Please note, our guidance includes the impact of a contemplated 25 basis point decline in the Fed funds rate in May.
In regard to client workforce levels, year-over-year employees on the platform growth came in below our expectations in Q2, resulting in an incremental headwind to the quarter and fiscal year. Given recent macroeconomic trends, our updated guidance for the back half of fiscal 2024 includes further moderation in client workforce levels through the remainder of the fiscal year. Finally, I'd like to provide our financial guidance for Q3 and full fiscal 2024. For the third quarter of fiscal 2024, total revenue is expected to be in the range of $395 million to $399 million or approximately 17% growth over third quarter fiscal 2023 total revenue. And adjusted EBITDA is expected to be in the range of $153.5 million to $156.5 million. And for fiscal year 2024, total revenue is expected to be in the range of $1.384 billion to $1.389 billion or approximately 18% growth over fiscal 2023.
And adjusted EBITDA is expected to be in the range of $474 million to $478 million, which represents 240 basis points of leverage over fiscal 2023. Operator, we are now ready for questions.
Operator: Thank you. [Operator Instructions] Our first question comes from the line of Scott Berg with Needham. Your line is open.
