Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) reported Q3 FY2022 results topping analyst expectations, with revenue up 32.2% year on year to $245.9 million. Guidance for next quarter's revenue was $217.5 million at the midpoint, 2.15% above the average of analyst estimates. Paylocity made a GAAP profit of $34.8 million, down on its profit of $36.8 million, in the same quarter last year.
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Paylocity (PCTY) Q3 FY2022 Highlights:
- Revenue: $245.9 million vs analyst estimates of $241.6 million (1.79% beat)
- EPS (non-GAAP): $1.22 vs analyst estimates of $0.91 (33.9% beat)
- Revenue guidance for Q4 2022 is $217.5 million at the midpoint, above analyst estimates of $212.9 million
- Free cash flow of $65.3 million, up from $14.8 million in previous quarter
- Gross Margin (GAAP): 69.2%, in line with same quarter last year
“The momentum from our record setting selling season continued throughout the third quarter, with strong sales execution across our target market. Third quarter revenue growth was 32%, 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,” said Steve Beauchamp, Co-Chief Executive Officer of Paylocity.
Founded by payroll software veteran Steve Sarowitz in 1997, Paylocity (NASDAQ:PCTY) is a provider of payroll and human resources software for small and medium-sized enterprises.
HR software benefits from dual trends around costs savings and ease of use. First is the SaaS-ification of businesses, large and small, who much prefer the flexibility of cloud-based, web-browser delivered software paid for on a subscription basis than the hassle and expense of purchasing and managing on-premise enterprise software. Second is the consumerization of business software, whereby multiple standalone processes like payroll processing and compliance are aggregated into a single, easy to use platforms.
Sales Growth
As you can see below, Paylocity's revenue growth has been very strong over the last year, growing from quarterly revenue of $186 million, to $245.9 million.
And unsurprisingly, this was another great quarter for Paylocity with revenue up 32.2% year on year. On top of that, revenue increased $49.9 million quarter on quarter, a very strong improvement on the $14.3 million increase in Q2 2022, and a sign of re-acceleration of growth.
Guidance for the next quarter indicates Paylocity is expecting revenue to grow 29.8% year on year to $217.5 million, in line with the 28.2% year-over-year increase in revenue the company had recorded in the same quarter last year. Ahead of the earnings results the analysts covering the company were estimating sales to grow 23% over the next twelve months.
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Profitability
What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Paylocity's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 69.2% in Q3.
That means that for every $1 in revenue the company had $0.69 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from the previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements continue.
Key Takeaways from Paylocity's Q3 Results
With a market capitalization of $11.5 billion, more than $96.4 million in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.
We were very impressed by the strong improvements in Paylocity’s gross margin this quarter. And we were also excited to see the really strong revenue growth. Overall, we think this was a strong quarter, that should leave shareholders feeling very positive. The company is flat on the results and currently trades at $188.87 per share.
Paylocity may have had a good quarter, so should you invest right now? It is important that you take into account its valuation and business qualities, as well as what happened in the latest quarter. We look at that in our actionable report which you can read here, it's free.
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The author has no position in any of the stocks mentioned.