Paylocity Holding Corporation (PCTY) Earnings Call Transcript & Summary

Hi. Good morning, everyone, and welcome to the 24th Annual Needham Growth Conference. Thanks for joining us this morning. My name is Scott Berg. I lead our enterprise software and SaaS research efforts here. Today with us, we have Paylocity. We have the company's CEO, Steve Beauchamp; and CFO, Toby Williams. Welcome, gentlemen.

Thank you. Good morning.

I guess, to get started, for those that are not familiar with Paylocity, how about a brief overview of the company?

Yes, sure. So Paylocity focuses on kind of midsized markets, so our average-size customer is about 100 employees. And we started really offering payroll services and have expanded significantly the number of modules that we offer beyond payroll services, really since the IPO coming up on 8 years in March. So we really now offer everything from a human capital management perspective that an employee or an HR department might need to manage employees, and so that would be to recruit employees, to manage performance, to really focus on learning and development, HR compliance, time and labor, benefits and so the entire spectrum of the human capital management. And we go to market really with a direct sales model, so we have salespeople across the U.S. that we've continued to expand over time. And they're really selling customers directly, working with the CFOs, working with the head of HR and then being able to onboard them oftentimes from traditional payroll providers, sometimes in-house solutions and then other growth providers as well. We -- prior to the pandemic, we're growing at about -- in the mid-20s from a revenue perspective, and then that kind of dipped down through the pandemic into the low to mid-teens and then has accelerated back up since then, above 30% growth. And so we kind of look at it as, although we had this kind of pandemic, if you take out all the impact of less employees on our platform, we've actually had pretty consistent execution, even throughout the pandemic. We really try to differentiate ourselves as having the most modern platform in the industry, so we spend a fair amount on our research and development. That's about 14% or 15% when you look at what we capitalize and what we expense. That has been fairly consistent for us throughout our public life cycle. We think that's an important part of the value proposition and really the primary point of differentiation, and we really back that up from a partnership perspective with our clients with a great service model. One of the interesting things about our industry is the clients do e-mail. They call us. There's a service component that is an important part of the equation as well. And we often hear from customers that come to us that they might have dissatisfaction, either with product with their current provider or with service. And this most modern platform for us really starts to connect employee-to-employee type interactions. So one of the interesting things we've added to the platform is a community, very social media-like component to our product that allows employees to be able to connect to HR teams, to be able to communicate with them. It's got recognition components to it. You can post. You can react. You can have personal interest. You can have professional groups like employee resource groups, and so we really try to be able to take our software, not only automate all these transactions that have to happen, but really allow HR teams to actually connect with employers and drive the culture. And that has become even more important throughout the pandemic as organizations have struggled to be able to retain the talent that they need and attract the talent that they need.

All right. Got it. You -- Steve, you mentioned community, and I think that's a great segue to our first question. But before I get there is for those that would like to ask a question, we will take questions from the audience. We will do Q&A at the end here. [Operator Instructions] But on the community aspect is the workforces today are certainly operating differently than what we were 2 years ago, a lot more work from home, at least as of this moment. But from the customers you've spoken with, has the pandemic changed how any of your customers really use HCM solutions?

Yes. I think prior to the pandemic, the problems that most customers were coming to us with is they really wanted more efficiency. So there is manual processes involved in how they manage their employees, whether that is from the recruitment cycle to performance management, to really driving kind of learning content or even things like benefit enrollment or tracking time. And so a lot of the problems that we try to solve is a single platform, super easy to use, mobile-first type of approach to really automate a lot of those transactions, so HR teams can often save time, be more efficient and spend more time on driving initiatives across the organization. That's really the primary problem that we would hear prior to the pandemic. As we moved into the pandemic and so many people had to drive change in how they manage people, whether that was going remote, more flexible schedules, staffing shortages, all the things that we saw throughout the pandemic, people started to come to us and say, "Listen, I actually need more strategic tools to actually communicate, to connect with my employees, to make sure that my employees are engaged to be able to drive change throughout the organization." And HR platforms, generally speaking, are good for automation, but they're not necessarily allowing me to meet some of these other needs that I'm seeing. And when I've got employees that are working at home, when increasing percentage of Gen Z workers are entering the workforce, when I'm having social change conversations at work, they want to understand what the mission of the organization is. And it's a really tight labor market, so it's hard for me to be able to find the talent that I need and retain the talent I need. I think the conversations really accelerated to be much more strategic and looking much more from an HCM platform. So to think about the HCM platform traditionally being about automation and now the conversation is much more about strategically how do I drive the culture, how do I create differentiation because, ultimately, one of the big challenges almost every customer that we talk to is how do I attract and retain talent. And if you asked a business owner 3 or 4 years ago their top challenge and they pick the top 3, they may or may not put attract and retain talent in that top 1 to 3. Every customer we talk to today, that is absolutely the case.

Got it. Last question on kind of the pandemic impact from the last 2 years is you mentioned the company has roughly -- or your customers have roughly 100 employees today. But as you see a 1% change in the employment macro, how does that impact that employee size of your customers. Is that a pretty tight correlation? A 1% increase or decrease probably moves your headcount up 1% or 2%. Or is it something different than that?

Toby, I'll let you grab that one.

Sure. Yes. I mean, I think it's directionally the right way to think about it. But I guess I would go back to some of the moves we saw earlier on in the pandemic when we saw unemployment rates going up, we certainly observed, as did a lot of others in the industry, a decline in employees in the platform, which obviously had a flow-through impact to revenue given our business model and pricing model around per employee per month or per employee per year pricing. And then I guess coming through, especially in the last 2 quarters, we've talked about seeing those employees in the platform coming back, and that is roughly correlated to some of the other broader labor statistics that we've seen in the macro certainly across the U.S. I think, though, one of the call-outs is it's not necessarily a direct flow-through impact, but it is directionally correlated. So as we see the unemployment picture improving, that has roughly correlated to an improvement that we've also seen in terms of employees in the platform. There's just not necessarily a direct and 100% correlation in terms of a 1% move here or there. There's timing impacts. There's certainly the impacts of what we actually see in the client base versus what you might see in the macro.

Sure. Of course. Let's move to product, and I love talking about product. You had your customer conference a couple of months ago, introduced some new products. Steve, you talked about this, the future of work. It had 5 drivers, at least I picked up on it. I thought that was incrementally different. But how does this future of work shape your product strategy today?

Yes. I think the way I'd like to think about this is there were a number of changes happening in the workforce pre-pandemic, and some of those changes were happening, I think, slowly. And so for some of our customers, they were really important; for other customers, they weren't. And so we talked about some of those just briefly in the intro, but the idea of remote work, obviously, was slowly happening on an increasing level. I think the fact that employees wanted much more say in where and how and when they worked and whether that's schedule flexibility, whether that is having multiple jobs and working in a gig economy-like setting that was obviously happening pre-pandemic. Employees also wanted to understand what the organization stands for. So when you think of some of the social change conversations that you see at work, that was already starting to happen. Employee resource groups, diversity, equity and inclusion, very important trends pre-pandemic. Well, as we hit the pandemic, all of this just accelerated. And at the same time, Gen Z were graduating and entering the workforce, all who had very passionate views on all of those topics. And so you get a big influx into the workforce of that younger generation. You have all of these changes happening at the same time. And so this is one of the hardest times I've seen in my career for HR professionals because you've got so much change happening. And then you've got organizations who might have been on a very slow change in terms of anticipating those trends and then had to overnight really react very quickly. And so one really great example and way to think about it is we introduced video into our platform at the start of COVID. And the theory was, hey, video is going to be a more important part of communication. The YouTube generation, the Gen Zs entering the workforce, they learn on YouTube. They basically do everything via video. And so we want to introduce that so that as you think 5, 6, 7, 8 years from now, video will become an important part of how HR teams communicate with their employees. Well, that accelerated massively over the last 2 years. Our video penetration rate increased faster than we would have anticipated, and we saw our customers creating announcements about what was going on in the organization. CEOs recording, video sharing them with employees, using video in the recruitment process to be able to talk about what that job is and who the company is from a culture perspective. Using video in reward and recognition. And so I just use that as one example of tying a product trend towards the actual future of work trends in the marketplace and seeing an acceleration in how our customers use it. I would think that the majority of our customers pre-pandemic, if I said to that HR person, I'd like you to record a video and share it with all your employees, most of them would not be comfortable with that pre-pandemic. And we've seen significant levels of increased utilization because of a trend that already existed before accelerate through the number of remote work and really the demand from employees who are kind of pulling HR teams to be much more creative in how they communicate.

So in terms of new products that we heard at the conference, I found collaboration and scheduling to be the 2 most interesting announcements, mainly because I can see high adoption levels from those 2 new modules. But out of all the things that you announced at the conference, what do you think will be most coveted by maybe customers in the near term?

Sure. So what I would say is one of the big advantages we have is we have a single organically built platform where everything is in the palm of your hands, on your phone or obviously if you want to be able to go online. So you're doing all of the important transactions. I'm looking at my paycheck, my W-2s this time of year. I'm punching in time. I'm going through open enrollment. And the reason I bring that up is we've got a kind of trusted source of information for the employees to frequently go back to, and so we look at how many employees are coming in on a weekly basis, on a daily basis, monthly basis. So we take the idea that we have really important information that employees want. And then on top of that, we start to build both flexibility and different ways for our clients to be able to connect. So let's think about a concept like collaboration. We know where the employees are working. We know who their other teammates are. We know potentially even projects that they're working on when you look at how they're allocating their time. And so we're going to introduce more and more collaboration capabilities that kind of extend what people have traditionally thought about HCM, leveraging all the data we have about the people. That's an area I'm super excited about. I'll give you one example of an interesting use case. If you're a brand-new employee and you join an organization, it's nerve-racking. You don't know everybody that's going to be there. You don't know the team. So we'll be rolling out kind of a team space where you can kind of log on. You can fill out an icebreaker type of survey which we've got built into our platform, survey products as well. You can share your interest. We can surface to you groups that you might personally be interested in. You can participate in work groups like employee resource groups, and so that sort of allows you to really understand an organization, particularly when maybe you're not in person the way you were before or maybe there's a bunch of small locations across the organization. So that's a collaboration use case around new employees that we think can be really interesting that leverages our data, and we've got a whole host of other use cases that we plan on building on top of that on a go-forward basis. And so that's the area that I think I'm really the most excited about going forward of the new products we introduced.

We will certainly be watching. One of the 5 drivers that you'd mentioned in the future of work theme was around employee experience. That was the theme that we found at the annual HR Tech Conference in September to be a key theme. I was happy just to go to a conference in person again. But why has employee experience become so important? And how does a company like Paylocity capitalize on it?

Yes. I think employee experience was becoming more important pre-pandemic, and I think all those trends I went through have made that more important. So a lot of that power dynamics has shifted back to the employee. So the employee has a lot of job options. They can go from one place to the next. They can work remote. They can potentially go on site. They can have multiple jobs and operate very gig-like fashion. And so when you see that power dynamic shift dramatically, you have to deliver a great experience, and you have to start thinking about your employees just like you think about your customers. They have choices to go somewhere else. They chose to spend their time and develop their careers with a specific organization, and that organization needs to spend a whole bunch of time and energy to make sure that they're able to retain people. And so delivering that modern employee experience becomes really, really important. So you imagine the Gen Z generation that's graduating from college, they haven't filled out paperwork. They haven't spent a whole bunch of time on administration. Everything they do is online. The way they learn is via video. They do a lot of variety of tasks. They're constantly switching tasks, moving from one spot to the other. So if the job is kind of what would they view as kind of a boring job, they've got options. If they don't think the organization is tied to a broader mission where they can have a bigger impact, they can find an organization that is. And so all of that pressure has pushed back on to the HR team to make sure I've got to deliver you a pretty modern experience that is very much like other software that you use in your everyday life, whether that's Amazon to shop or whether that's YouTube to learn online or whether that's some of your social applications to connect and communicate with employees. If you're not doing that, the employee comes in and says, "This feels old. It doesn't feel modern. It's hard for me to kind of get connected in terms of what I'm doing, and I have a ton of choices available to me." So it's just really increase the importance of overall employee experience. And if you think about those moments that matter in an employee life cycle, the new hire, the promotions, the career development, the performance cycle, the ability to learn new skills, all those things have to happen in a fairly modern fashion. Otherwise, you'll get a level of dissatisfaction from employees that's higher than you would have several years ago.

Sure. Yes. I just thought it was kind of crazy there, seeing a lot of new spend, definitely new vendors that were putting a product there. And I know it's been a focal point for you all. So certainly, I would expect you to capitalize on it somehow. Continuing the product theme, I know you all continue to press the innovation envelope, and that also includes some acquisitions. This fall, you acquired a company called Blue Marble in the employment -- excuse me, global employment space. Can you talk about what this brought Paylocity because I think it's some functionality your typical public investor is not familiar with?

Sure. So when you think of this future of work trends, one of the things that we started to observe, no surprise, an increased level of remote work from our clients and increased flexibility, so 2 days in the office instead of 5 days in the office and so on and so forth. And so organizations are starting to get better at managing employees in a remote fashion. At the same time, you've got this trend of talent shortages across the U.S. in a very tight labor market. And so what's happening is organizations are starting to become even more comfortable with having international employees and finding talent potentially abroad. That was increasing slowly, I think, ahead of the pandemic. We saw that accelerate in the pandemic and people becoming more comfortable with managing remote workforces and therefore different time zones and geographies. We had a partnership with a company called Blue Marble that basically offered our customers the ability to get those employees paid in different countries. And it was a good partnership for us, but we thought that our ability to be able to own that solution and truly integrate that employee experience for employees that were either in country or out of country would create some differentiation in the marketplace and even customers of the market that we focus on, which is average of 100 employees, but we have clients with several thousand employees and many of those customers. So we felt like that was going to be an increasing trend, and we had a significant number of mutual customers already. And so bringing that onboard, we think, creates differentiation from a competitive perspective, and it really aligns with our goal of having the most modern platform, making sure that we actually have solutions for problems that are growing and are really trying to tackle the future of work.

With all this new module speak here, I believe the last time I checked in with you all, the average per employee -- or I guess the fully loaded per employee per month for all your modules was a monthly cost of $35 for that entire platform. How should we think about that cost today if someone buys every module on your platform? My guess is it's above $35. But maybe help us understand where it is today and where you expect it to maybe grow to over the next couple of years.

Sure. Toby, I'll let you tackle that one.

Yes. So you're right, Scott. I mean, that's where we sit today. From a per employee per year standpoint, we're at $420, and that's up more than 100% from where we started at $200 per employee per year at the time of the IPO in 2014. So I think you see a trend of increasing per employee per year chargeability across the suite that correlates to all the product and tech spend, all the R&D spend that is geared towards producing new modules, all of which Steve has really gone through. I think we called out a near-term target of $500. We don't think that represents any ceiling in terms of where the platform can grow to in terms of the overall chargeability of the suite. And that $420 number doesn't include things like Blue Marble that you just asked about, also doesn't include things like collaboration. So I think there are some additions to the platform that we have that we're still working on from integration and then from a relaunch perspective, which would be additive to the per employee per year chargeability across the suite. But I think to Steve's point, I mean, I think we feel pretty good about where we sit today in terms of the types of solutions that are really resonating in the market being the most modern platform and focusing on the employee experience. So I think we feel pretty good about where we sit today from a competitive positioning standpoint with the product suite and certainly some upside left to go in terms of chargeability.

Sure. With all of that innovation, Toby, you talked about effectively doubling the amount of cost or products customers could purchase over the last 7, 8 years. How do you sell them effectively to your installed base? Because I know you've talked about investing in a team that will directly upsell or cross-sell modules back into the base. But is that a mature motion for you today, still working on that? And does that become an even more material part of the maybe growth story here going forward?

Yes. You're right. So we have a team that's dedicated to selling back into the customer base, and that really started shortly after the ACA period back in 2016, grew from a small handful of people into a more substantial force today, but it's still a relatively small part of our overall new sales in any given year and certainly a small part of our overall revenue. So I think that's something -- it's a mature motion in terms of I think we have some maturity around how we go back and how we actually sell back into the customer base. But in relation to our overall sales force, it's still a smaller piece of it. I believe we still have plenty of room to grow that over time, both in terms of the dollars that we put against that sales force but also in terms of ability to sell an expanding suite of products back into the customer base. But I think the thing I would just frame is given our overall relatively small share of a pretty big market, so depending on how you might calculate that 2%, 3% penetration into our overall TAM, most of our go-to-market motion, most of our go-to-market focus in resourcing and spend goes to new logo acquisition. And so I think that is the biggest growth driver for us. And certainly, we'll continue to invest in our back-to-base sales.

Lastly, on product for me. I get this question, I think, every conversation in the HCM space, and I'm sure you do at most of your investor meetings is, is on-demand pay. You all have an on-demand pay module. I know you've had it for a couple of years now. And for those that are unfamiliar with the functionality, it enables employees to drop on earned wages earlier before their typical pay dates. I guess, what is adoption of this functionality like today from your own customers? And how does the functionality change, if at all, maybe over the next several years from what you see it today?

Sure. I think we were one of the early entrants in terms of human capital management providers into the on-demand pay space, and we've had increased penetration gradually and relatively slowly over time. So it definitely gained a little bit more popularity, I think certainly as early in the cycle where people were having potentially financial challenges and there was a fair amount of upheaval in the job market. So early access to wages. If you've got a partner spouse that is having job challenges, you get wage access. We saw a little bit of an increase there, but it has been gradual. And so the way it works, so if you're unfamiliar with it, you simply would go on your phone, you would look at how much you've earned already this payroll period. We'd actually show that to you from a gross-to-net perspective as if we've calculated it for you. And then you would then be able to take out a certain amount of that earned wages. And so employers sometimes get a little bit worried in terms of making sure that, especially -- it's very popular -- more popular with hourly employees. And so making sure those hours are right is kind of important, right? So if I'm punching in hours, and I forgot to punch in at the end of the day, and it doesn't get fixed to the next day, and it looks like I worked kind of all night, there's notifications and alerts that go off. But oftentimes, the supervisor has to get involved in fixing that and reminding the employee. And so there is this administration process that needs to be able to happen that I think customers, generally speaking, have to be fairly tight around those processes to feel more comfortable with on-demand pay. And then there's just it's a new product, and there's a lack of familiarity. It doesn't actually cost our customers anything. They can pay for it if they want. It's a small transaction fee; or the employee could pay for it, and we give the customer that option. And so I would describe it as a nice, gradual kind of growth product for us but kind of on the slower growth than I think a lot of the hype around on-demand pay. And I think, long term, there's definitely some other options, right? We've seen some wallet products in the marketplace where you can kind of get paid on a wallet rather than have it put into your bank account, which is the model that we ultimately use. I think my view is you've got to give choice in this model. So think about the employee. At the end of the day, if I get a job, and you say the only way you can get paid is on this brand new wallet that you have, it's probably fine with some employees. But other employees might be like, "I think just prefer that in my bank account." And remember, this is an employee -- it's an environment where the employee has a fair amount of power, and so you want to really drive that great employee experience back to them. And so our view is we want to give more choice from an on-demand pay over time: instant payment, automatically, payment options in terms of whether that's direct deposit, whether those other payment options like wallets. And I think that's where we're going to be able to see innovation in the space is customers will become more comfortable over time. We do expect that to be able to increase, and we expect the number of payment options to be able to increase and really driven by employee preference versus the employer saying, "This is the only way that you're going to get paid," and not giving that employee the same level of choice that they would expect.

Sure. Yes. I'm a big believer in the next 2 years, we won't even have this conversation again because it will be so commonplace and effectively a commodity, to some extent, not that everyone will be using it, but it will be almost table stakes in the environment.

I agree.

Moving on to kind of the demand environment. The pandemic certainly made some changes we mentioned around the product side earlier. But at least from my recent work in the space, demand in the HCM segment feels fairly normal. We've done a fair amount of work on over the last 4, 5 months in particular. Would you agree with that comment? Kind of you mentioned before it kind of smoothed out maybe the dip from the initial recession you're kind of on that same state, but it sounds like you...

Yes. I think what we saw as we were going through the pandemic, it's probably intuitively what you would have expected. And so in very in-person-oriented industries, so think of that like restaurant, hospitality, for example, where we saw closures and we saw minimum -- or sorry, reduced capacity-level restrictions in states, we absolutely saw those customers not only have less employees on the platform, but we saw those prospects be a little less active in the market in terms of looking at alternative HCM platforms. And you could imagine from a business priority perspective, that probably is not top of mind when you're trying to figure out when you're going to reopen and trying to figure out what the demand environment is going to look like and how many people you're going to need. We did definitely bring some customers on in those spaces. We just saw a little bit of reduced level of activity. As those restrictions were removed, we started to see more normalized environment in terms of evaluating HCM vendors. So we look at things like how many appointments are our reps going on? What type of referrals are they getting from brokers? And what do those activity levels look like? And as we started exiting the restricted part of the pandemic, we started to see an increased level of activity to the point where I would say today, and this is one of the things we called out on our last earnings call, it feels very normal relative to what we saw pre-pandemic. And if you go back pre-pandemic, we were having some of the best sales quarters that we've had in our history. So we entered the pandemic with a lot of momentum. Our goal was to be able to try to maintain that momentum through this, a little bit more turbulent time, so that we can come out the other side with the same type of momentum. And I think when you saw the results for us last quarter, which was kind of above 30%, 34% growth -- revenue growth, you could see that we've been able to do that.

Fantastic. I want to remind everyone, you're my top mid-cap pick this year, so I'm expecting you to continue that for a few quarters. No, it's great to see, though. Also on the space, I think it was when we come out of the pandemic a little bit is there's plenty of industry analysts that continue to call for spend in the HCM industry to continue growing at maybe an 8%, 9%, 10% rate for the next couple of years. But it's not really a catch-up trade from 2020. It's just kind of, as you said before, extending what the growth trajectory was back in '18 and '19. But what do you think is driving this level of growth? Because seat count is certainly not growing at an 8% or 9% rate overall.

Yes. I think it goes back to a little bit to what I said before, and I'll add more context to it. Like this is a very complicated environment to be an HR professional in, and it's a stressful environment for them. And they're looking for different ways to be able to drive attraction and retention of talent. And I'll give you kind of a good example of that. We released, in our product, kind of a machine learning, artificial intelligence algorithm that actually calculates a score called Modern Workforce Index. And what we did is based off of the roughly 30,000 clients on our platform, we looked at the customers that actually had the best retention and growth in their employee base, and we looked at what they were actually doing in our platform to drive that. And we looked at it by industry, right? So you could say, hey, the thousands of hospitality and restaurants compared to the other hospitality and restaurants, and we score them all with a Modern Workforce Index. And we could see what they were doing. And like the fundamental story there is they were looking beyond the transactional part of the equation. Yes. Were they tracking time accurately? Were they managing their cost? Of course, they were doing those types of things. Were people getting paid accurately and so on? But they were doing things like surveying their employees on an ongoing basis and gathering feedback. They were loading content into our learning management and delivering learning management content. They were creating resource groups in community. They were frequently posting business updates to employees, whether that was video announcements or text-based announcements, and employees were getting in there and they were reacting. And so they were getting a higher level of employee engagement fundamentally, and that higher level of employee engagement ultimately was driving higher retention rates. And because of that, we also saw them actually growing the number of employees at a faster rate. And so what we've done is we've taken all of that learning, and we actually have created a recommendation engine that says to customers, if you do these things based off all the other customers that we have on our platform, you're going to be able to improve your retention. And so it kind of changes the entire conversation because what we heard from HR people, "I don't know what to do. I think this is a complicated environment. It's challenging, and I'm not sure what to do." And so we've really tried to react to that and say, "We understand you don't know what to do. We're going to use the data that we have across our 30,000 customers, and we're going to surface to you what we think are the most important recommendations." Some of those can be a little bit complicated, but a lot of them are actually fairly easy to do, right? I mean, at the end of the day, instead of HR sending an e-mail newsletter, how about you just kind of record a video and tell people what's happening from an HR perspective? How will you do a pulse survey on a monthly basis to see what's going on with your teams, et cetera, et cetera? And so that's been more and more popular over the last couple of years, and we've seen the number of return visitors to our Modern Workforce Index increase. And it's really resonated with not only the HR leaders but also the C-level leaders. So that's something that someone like me and another organization will spend a lot of time and attention to look at.

I know we only have a few minutes left, so let's take a question or 2 from the audience here is -- first question is on -- looks like replacements. Both ADP and Paychex have noted increased retention since the onset of COVID. Have you seen any changes in the sources of your net additions? That's the first part of the question. The second part is, "Are you employing any different competitive or selling tactics to replace incumbent solutions already there?"

Yes. So I mean, a few things in that question. I mean, I think the first one is just on overall retention rates. One of the things that we've seen, I think, across the industry and across a number of different providers, us included, is record retention levels throughout the course of the pandemic. And I think some of that goes back to Steve's comments a few minutes ago, just around -- particularly in verticals that had a heavier impact like restaurants or hospitality or something like that. I think there was definitely slowed demand because of sort of the existential nature of the threat from the pandemic in those businesses and replacing HCM solutions wouldn't have been at the top of their list in terms of things to do in the heart of the pandemic before restrictions were really lifted. So I think one of the knock-on impacts of that across the industry, us included, was record or near-record retention levels. And then in terms of the sort of the mix of source of business question, ADP and Paychex have traditionally been the biggest bucket for us in terms of source of new business, and that has really continued throughout the course of the pandemic and remain so today. I think one of the shifts that we've seen overall over a number of years has been some growth in the in-house as a source of business that we brought on to the platform just as we've expanded the business into markets across the U.S. and just growing our sales team, but I think that's sort of a natural phenomenon that you would expect based on the mix of business that exists out there. So -- and I think then on the sort of the selling tactics, I think we've been pretty consistent. As Steve was saying, going into the pandemic, in the first 9 months of fiscal '20, we were actually accelerating our growth from 23% to 25% in that first 9 months. And a lot of that was based on the investments that we've made in go-to-market, in product and in marketing. And part of that was pushing more on digital and investing more on digital lead gen, which we've seen success in through the course of the pandemic. So I mean, I think those are the levers that we were really pulling and investing in going into the pandemic. And I think we've really tried to maintain our investment levels across the business, including in go-to-market as we've come through the pandemic, so that we could exit this time frame during the pandemic with the same type of momentum that we entered with. And I think based on our Q1 results being 34% year-over-year growth and how we've guided the year, I think we feel pretty good about our coming out of this with the same type of momentum that we went in. So no major shift in terms of our go-to-market motion, just I think continuing the investments and continuing the strategy that we put in place coming into it.

Great. Last question is on interest rates. We are in an increasing or rising interest rate environment in 2022. Directionally, we expect you to benefit. But is there any way to quantify maybe a 25 basis rate increase relative to your interest on customer funds held?

Sure. Yes. I mean, so we give a pretty clear indication of what we expect in any quarter our client-held funds to be. I think we said it was around -- we expect it to be around $1.8 billion this quarter. And so straight math on that, for 25 basis points would give you just under $5 million. But I think the key in terms of thinking about this, you're right directionally, to the extent that the fed increases overnight rates, which is the impact that would benefit us the most, is that whenever that happens, there's a time lag between the day that they do that and the time that we actually get the flow-through from our banking partners, of which we have 10% plus, and you don't always get every cent of that. So you don't always get a direct flow-through of the full raise, and it takes a little bit of time for it to work its way through the system. I think generally, though, to the extent that we find ourselves in an environment where the fed is increasing rates, that does benefit us from a revenue standpoint. And certainly, those are high-margin dollars that flow right through the P&L. So I think that is a -- to the extent that, that becomes the case, that will certainly benefit us from both a revenue and profitability perspective.

Excellent. We are up against the clock, so I will sign off here. If anyone has any questions or need any assistance during the rest of the conference, feel free to reach out to any of your Needham representatives. And Steve and Toby, wanted to thank you so much for your time today, and good luck with the rest of the meetings.

Thank you very much.

Have a good day.

Bye-bye.