Payroll and human resources software provider, Paylocity (NASDAQ:PCTY) announced better-than-expected results in the Q2 FY2023 quarter, with revenue up 39.2% year on year to $273 million. On top of that, guidance for next quarter's revenue was surprisingly good, being $332.5 million at the midpoint, 4.41% above what analysts were expecting. Paylocity made a GAAP profit of $15.6 million, improving on its profit of $9.85 million, in the same quarter last year.
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Paylocity (PCTY) Q2 FY2023 Highlights:
- Revenue: $273 million vs analyst estimates of $259.6 million (5.13% beat)
- EPS (non-GAAP): $1.12 vs analyst estimates of $0.74 (52.1% beat)
- Revenue guidance for Q3 2023 is $332.5 million at the midpoint, above analyst estimates of $318.4 million
- The company lifted revenue guidance for the full year, from $1.12 billion to $1.15 billion at the midpoint, a 3.02% increase
- Free cash flow of $49.3 million, up from $2.98 million in previous quarter
- Gross Margin (GAAP): 67%, up from 63.8% same quarter last year
"Our differentiated value proposition of providing the most modern software in the industry, coupled with continued strong sales execution, helped drive recurring and other revenue growth of 31% and total revenue growth of 39% in the second quarter. Our continued strong momentum is the result of ongoing investments in product innovation, including leveraging last year’s acquisition of Cloudsnap, a flexible, low-code solution for integrating disparate business applications,” 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 two years, growing from quarterly revenue of $146.3 million in Q2 FY2021, to $273 million.
And unsurprisingly, this was another great quarter for Paylocity with revenue up 39.2% year on year. But the growth did slow down a little compared to last quarter, as Paylocity increased revenue by $19.7 million in Q2, compared to $24.3 million revenue add in Q1 2023. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.
Guidance for the next quarter indicates Paylocity is expecting revenue to grow 35.1% year on year to $332.5 million, in line with the 32.2% 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 24.2% 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 67% in Q2.
That means that for every $1 in revenue the company had $0.67 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it trending up over the last year this would still be considered low gross margin for a SaaS company and we have no doubt shareholders would like to see the improvements continue.
Key Takeaways from Paylocity's Q2 Results
With a market capitalization of $12.2 billion, more than $120 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 enjoyed the positive outlook Paylocity provided for the next quarter’s revenue. And we were also excited to see the really strong revenue growth this quarter. 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 $226.04 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.